(), Abhishek Gaurav
() and Melinda Suveg
Sneha Agrawal: International Monetary Fund
Abhishek Gaurav: Princeton University
Melinda Suveg: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Abstract: In this paper, we study a new channel to explain firms’ price-setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms that use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.
33 pages, November 16, 2021
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