The creation of new businesses (“entry”) declines in recessions. In this paper, I study the effects of pro-cyclical entry on aggregate employment in a general equilibrium framework. The key features of the model are that firms’ markups increase with market share and adjustment costs prevent employment from reallocating across firms.In response to a decline in entry, incumbent firms’ market shares increase and they increase markups and reduce employment. To quantify this mechanism in the model,I study the relationship between variable inputs and revenues in panel data on large firms. Viewed through the lens of my model, my estimates imply that for large firms, the within-firm elasticity of the markup to relative sales is 35%. I then study shocks to entry in a model that is calibrated to be consistent with this elasticity, finding that a fall in entry can lead to a significant contraction in employment. A shock to entry that replicates the decline in the number of businesses during the Great Recession generates a prolonged 3 percent fall in employment in the model. Finally, I show that the increasing correlation between market shares and markups over the last 30 years implies that the effect of entry on the business cycle is becoming stronger with time.
Presented at: Federal Reserve Board Pre-Job Market Conference (August 2020), NYU Stern Macroeconomics Lunch Seminar (September 2020)
In this paper, I study monetary non–neutrality in a frictional product market. The model incorporates the idea that goods are in general not monopolistically supplied; rather, consumers can purchase the same good from many outlets. I find that incorporating this feature into a menu cost model increases the degree of monetary non–neutrality. The reason is that competition between stores makes their prices complementary, so that firms face strong penalties for setting prices far away from their competitors. It makes pass–through of cost shocks heterogeneous and decreases the strength of the selection effect. I also use the model to study cyclical changes in monetary non–neutrality. I find that the data are consistent with a decline in the competitiveness of markets in recessions, which makes monetary policy less effective at stimulating output.
Presented at: 13th NYU Search Theory Workshop (April 2019)
“Monopoly Power and Monetary Non-Neutrality” (with Simon Gilchrist and Adam Guren)