Economies in transition : ageing, markups and place-based policies

Abstract

In the first chapter, joint with Daniele Angelini, we analyze the effect of a change in the age composition of consumers on growth through competition. To identify the effect coming from the demand side of the economy, we instrument changes in the age composition of demand with unexpected foreign demographics shocks. We find that middle-aged consumers reduce competition. We rationalize our results in a general equilibrium heterogeneous agent model. Focusing on the USA, we estimate that changes in the age composition of consumers have contributed to a reduction in GDP growth of 8.7% in the period 1995-2004 and an increase of 10.3% in the period 2005-2019. In the second chapter, joint with Philipp Kircher and David Koll, we estimate labor market responses to local sector-level shocks as proxies for place-based policies. We show that local policy maker could face a trade-off between subsidising low-growth sectors with large short-term employment benefits or subsidising high growth sectors with initially smaller but persistent labor market improvements. Finally, in the third chapter, I present a model of consumer search that captures firms’ endogenous growth along two margins: customer capital and product range. The model provides micro-foundations for the existence of within-firm heterogeneity in terms of prices, sales and markups. Consistent with recent empirical evidence, firms do not increase markups over their growth path; instead, I show that they achieve a higher surplus from each match by increasing their product range and, therefore, buyer’s loyalty. Nevertheless, as a firm grows larger, its share of incumbent buyers increases and demand spreads more homogeneously across goods, mechanically reducing its average markup. I called this novel mechanism the curse of the large firm.