Variable Markups, Incomplete Pass-Throughs, and R&D Misallocation

Date: Friday, Nov. 21
Time: 3:30 pm
Location: Arts 109

About this event

Assumptions about demand influence the positive and normative implications of growth models.

In light of the growing evidence of variable markups and positive yet incomplete pass-throughs, we develop an endogenous growth model with a Kimball (1995) demand system. It features differentiated firms engaging in monopolistic competition and making forward-looking investments in R&D to improve their process efficiency.

The model succeeds in matching the evidence on markups and pass-throughs by featuring a lower elasticity of demand at lower prices. A novel implication of our model is that market power does not only distort the overall level of innovation, but  also the cross-firm allocation of R&D resources.

Using firm-level administrative data from France to discipline our model, we find that this R&D misallocation slows down aggregate growth by 0.92 percentage points.

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