Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1418: Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden

Sneha Agrawal (), Abhishek Gaurav () and Melinda Suveg ()
Additional contact information
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.

Keywords: Price setting; Markups; Input price volatility; Precautionary pricing

JEL-codes: D21; D22; D24; D42; D80; E31; E32; L11; L60

33 pages, November 16, 2021

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