MacKay, Alexander Miller, Nathan H. Remer, Marc Sheu, Gloria
Year of Publication:
EAG Discussion Paper 14-1
We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may frustrate inference.