Research

Working Papers

“Customer capital and firm innovation” (JMP)

This paper studies the role of customer capital in driving firm innovation decisions and the resulting effects on aggregate productivity and concentration. I develop a step-by-step innovation model where households form deep habits in consumption. These habits form customer capital for firms: firms can decrease prices and increase production to build customer capital and raise future profits, at a potential loss to current profits. As the strength of habits increase, leader firms face higher and more inelastic demand while followers face lower demand. I show how these movements in demand result in an increase in innovation by leader firms relative to follower firms, leading to greater productivity dispersion and concentration. I find evidence for this effect in data on U.S. public firms: in sectors where outputs are more heavily consumed by older households—those with stronger habits—the most productive firms increase their R&D investment relative to others. I discipline the strength of habits in the model base on micro estimates of household evolution of consumption. I then use the model to quantify the effects of changes in aggregate customer capital arising from aging demographics. The model suggests that the shift toward older households between 1980 and 2019 accounts for 10%-35% of the observed trends in rising revenue productivity dispersion among firms, increasing market concentration, and higher aggregate markups. The model also highlights how customer capital influences the effectiveness of innovation policies: with customer capital, innovation subsidies have a significantly larger impact on concentration and markups—around two to three times greater than in an environment without customer capital. [draft]

“Concentration, markups, and aggregate volatility”

This paper explores how a rise in industry concentration could lead to a decline in aggregate output volatility. I build a menu cost model with a continuum of sectors, where each sector has two dominant firms and a fringe of monopolistically competitive firms. When faced with movements in marginal costs from TFP shocks, dominant firms pass less of the changes through to prices compared to monopolistically competitive firms. This arises from strategic complementarities in pricing. Dominant firms want to price close to their rivals, generating feedback that amplifies the effect of menu costs on limiting movements in prices. Less movements in prices imply more stable demand, hence lower output volatility, so that the effects of TFP movements are dampened for dominant firms. With higher concentration, the composition of aggregate economic activity is shifted towards dominant firms, dampening the effects of TFP movements on aggregate output volatility. In the calibrated model, a 10 percentage point increase in concentration leads to a 0.017 percentage point decrease in the standard deviation of output volatility – around 2% of the decrease in volatility experienced from the Great Moderation.[draft]

Publications

“Exorbitant Privilege and the Sustainability of US Public Debt” (with Jason Choi, Diego Perez, and Rishabh Kirpalani), AEA Papers and Proceedings, May 2024 [paper]

“The Secular Decrease in UK Safe Asset Market Power” (with Jason Choi, Diego Perez, and Rishabh Kirpalani), AEA Papers and Proceedings, May 2023 [paper]