Dangerous shortcuts: Ignoring marginal cost determinants in markup estimation
Files
First author draft
Date
2018-06
DOI
Authors
Jaumandreu, Jordi
Version
First author draft
OA Version
Citation
Jordi Jaumandreu. "Dangerous Shortcuts: Ignoring Marginal Cost Determinants in Markup Estimation."
Abstract
De Loecker and Warzynski (2012) proposed a way to estimate markups under imperfect competition from firm-level data. The basic idea is first to estimate the elasticity
of output with respect to a variable factor of production, and then divide this elasticity by the share of the input expenditure in the relevant sales. This note argues that
this way to estimate markups is affected by a problem of circularity: under imperfect
competition, to estimate the elasticity of an input you need to know, or estimate at the
same time, the markups. The application of the proposal, ignoring this fact, is likely to
produce inconsistent estimates and generate large biases in inferences about markups.