Work in progress
Production Functions with Noisy Data: A Flexible Cost Share Approach (JMP)
formerly titled "The Cost Share Approach to Production Functions"
Abstract: I introduce a new method to estimate heterogeneous output elasticities, markups, and revenue productivity using standard firm-level data. The approach avoids common assumptions on demand or productivity dynamics required by proxy methods. It exploits firms' optimizing behavior, and the fact that output elasticities are proportional to cost shares adjusted for frictions. I develop a two-stage semi-parametric procedure to address the key challenge: measurement error in unobserved capital costs (e.g., from adjustment frictions). The first stage non-parametrically purges this error from noisy proxies; the second uses these purged costs to estimate firm-specific elasticities, markups, and productivity. Monte Carlo simulations confirm the estimator's accuracy. Applying the method to Compustat, I find substantive differences with the past literature on the distribution of output elasticities, markups, and revenue productivity, with the treatment of Selling, General, and Administrative (SGA) expenses playing a critical role. When SGA is treated as a sunk cost, markup dispersion drives revenue productivity dispersion, and smaller firms exhibit higher markups and productivity. These results are reversed if SGA is treated as a production input.
Winner of the FJPB Young Economist Prize (JEI 2025)
Empirical Bounds for Weighted Harmonic Means of Price-Cost Markups, with Steve Bond
Abstract: Under the assumptions of constant returns to scale production technologies and competitive input markets, the sum of revenue elasticities across all inputs is the reciprocal of the price-cost markup for a profit-maximising firm. Profit maximisation also implies bounds for arithmetic means of revenue elasticities in a large sample of firms. These bounds are available for both flexible and predetermined inputs, and require data only on revenue shares (i.e. input costs as a share of revenue). Summing over inputs, we thus obtain empirical bounds for harmonic means of price-cost markups. Using company accounts data from Compustat, we calculate these bounds for publicly traded North American firms over the period 1955-2022. Our results are consistent with a modest rise in the sales-weighted harmonic mean of markups since the early 1980s, and a considerable increase in the cross-section dispersion of markups.
Market Power along the Supply Chain of Milk in Great Britain, with Howard Smith
work in progress
We estimate a structural model of the British supply chain of milk that includes dairy farmers, manufacturers, supermarkets, and final consumers. We investigate how surplus is shared along the entire supply chain, and find that farmers face markdowns that are largely captured by supermarket chains through bargaining with manufacturers.
How Input Price Controls Can Fail: How To Test and Fix
work in progress
When estimating production functions, several papers deal with unobserved input prices by using the price of output as a control. I show that this procedure fails when the price of output is measured with error, because the control variable (output price) contains the same error term as the dependent variable (output). When this happens, a (biased) revenue function is estimated instead of the production function, leading to issues in settings with output market power. I show that this bias can be detected from the coefficient on the control variable.