Firm revenue elasticity and business cycle sensitivity

Abstract

We show that it is not necessary to have price and quantity data separately in order to study firm responses to business cycle shocks. We explain that revenue elasticities, which measure the response of firm revenue to input changes and combine price and quantity data, are sufficient to understand business cycle amplification. We present theory to show that higher revenue elasticity firms generate greater business cycle amplification. We use US data to measure revenue elasticities at the firm level, and we show that higher revenue elasticity firms respond more to business cycle shocks, consistent with our theory. We conclude that trends towards lower revenue elasticity firms implies weaker business cycle amplification over time.