Price Rigidity and Investment Irreversibility in Customer Markets: Evidence From Credit Supply Shocks (Job Market Paper)
This paper argues that investment irreversibility in tangible capital leads to greater output price rigidity. The mechanism is that irreversibility strengthens the customer-market incentive: selling more output today builds a sticky customer base, which insures against bad shocks to future demand. Greater ex-ante investment in the customer base then leads a firm to choose higher price changes when financial constraints tighten. These higher price changes make markups more countercyclical and thereby increase output price rigidity. To show that this connection is empirically relevant, I use the bankruptcy of Lehman Brothers as a natural experiment in the credit supplied to firms and find that, while firms in industries with low irreversibility cut prices, firms in industries with high irreversibility do not. Abstracting from general equilibrium effects, aggregate prices are almost 40% more rigid after reductions in credit supply than if all industries had low irreversibility.
Belief Disagreement in Production Networks (draft available on request)
This paper studies the macroeconomic impact of belief disagreement between firms in different sectors of a production network when firms choose labor quantities before sectoral TFP disturbances are realized. Belief disagreement reduces aggregate output by causing firms to miscoordinate their labor choices, which in turn further reduces output through spillovers. A hypothetical vignette experiment run on US small businesses provides empirical evidence that disagreement between firms and their suppliers can affect firms’ price and input decisions.