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CEP discussion paper
Markups, intangible capital and heterogeneous financial frictions
Carlo Altomonte, Domenico Favoino, Monica Morlacco and Tommaso Sonno January 2021
Paper No' CEPDP1740:
Full Paper (pdf)

JEL Classification: D22; D24; G32

Tags: markups; financial constraints; intangibles; productivity; technological change

This paper studies the interaction between financial frictions, intangible investment decisions, and markups at the firm level. In our model, heterogeneous credit constraints distort firms' decisions to invest in cost-reducing technology. The latter interacts with variable demand elasticity to generate endogenous dispersion across firms in markups and pass-through elasticities. We test the model's predictions on a representative sample of French manufacturing firms over the period 2004-2014. We establish causality by exploiting a quasi-natural experiment induced by a policy change that affected firms' liquidity. Our results shed new light on the roots of rising markups and markup heterogeneity in recent years.