Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154836
Authors: 
Bottasso, Anna
Galeotti, Marzio
Sembenelli, Alessandro
Year of Publication: 
1997
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 73.1997
Abstract: 
In this paper we look at both the theoretical and empirical behaviour of price-cost margins when capital market imperfections affect firms' markup policies. We present a model of a firm operating in an industry with differentiated products and facing imperfect markets for financing operations. The model results in an Euler equation for the optimal price path which is estimated using data for several hundreds Italian firms over the period 1981-1993. The empirical results suggest that: (i) capital market imperfections are present in the sense that firms in our sample pay a premium on external finance which significantly depends on the debt to sales ratio; (ii) according to our estimates constrained firms find it optimal to cut price compared to unconstrained firms; (iii) as firms are more likely to be financially constrained in recessions, our results imply that financial market imperfections tend to make markups procyclical.
Subjects: 
Markup
Financing constraints
Differentiated products
JEL: 
D21
D43
D92
E30
Document Type: 
Working Paper

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