Research

Measured aggregate markup—the ratio of price to marginal cost—increased substantially from the 1980s until recently. Over the same period, discount rates for financial assets declined steadily. This paper proposes a general equilibrium model in which exogenous reductionsin discount rates drive the rise in aggregate markup. In the model, firm-level markups are deter-mined by market power. A decline in discount rates raises the present value of future profits and strengthens firms’ incentives to expand, but this effect is more pronounced for firms with greater market power and higher markups than for those with smaller market shares. As a result, the equilibrium aggregate markup increases in response to negative discount rate shocks. Quantitatively, when calibrated to match the observed changes in discount rates, the model successfully reproduces the dynamics of markups in the data, including the decomposition of aggregate markup into between-industry and within-industry components.

Measured markups in the United States have risen substantially since the 1980s, while labor's share of income has declined over recent decades.  This paper studies how declining discount rates affect markup dynamics differently across relatively capital-intensive and labor-intensive sectors. I develop a dynamic oligopoly model with two sectors that differ in factor intensity. A decline in the discount rate lowers the rental cost of capital and disproportionately strengthens expansion incentives and markup growth in the relatively capital-intensive sector. Empirically, I classify industries using pre-period labor share. Following Donangelo, Gourio, Kehrig, and Palacios (2019), labor share is measured as labor expenses divided by value added; industries in the bottom half of the pre-period labor-share distribution are interpreted as relatively capital-intensive, and industries in the top half are interpreted as labor-intensive. In Compustat data, low-labor-share industries experience substantially larger markup increases than high-labor-share industries at the 2- and 3-digit NAICS levels. The empirical evidence supports the model's central prediction that declining discount rates generate stronger markup growth in relatively capital-intensive industries.

We quantify the role of demographic change in the decline of house hold food expenditure shares using survey microdata from India (1983-2011) and Vietnam (1998–2006). A nonparametric Shapley decomposition attributes about one tenth of the food share decline to demographic shifts in India and about one sixth in Vietnam, with the remainder split between an income-distribution component and a large unexplained time residual. We embed the same demand structure in a static two sector general equilibrium model with Stone-Geary preferences and a child consumption equivalence weight. The equilibrium delivers a closed-form log-linear decomposition of the food share change into a demographic channel and a productivity channel, and gives the Shapley demographic component a price-feedback interpretation through the equilibrium relative price of food.