Pricing Decisions under Financial Frictions: Evidence from the WDN Survey

Abstract

I test the predictions from Duca, Montero, Riggi and Zizza (2017), who develop a customer-market model with consumer switching costs and capital-market imperfections in which price-cost markups behave countercyclically, with a subsample of European firms participating in the Wage Dynamics Network 2014 survey. I use a novel empirical approach developed by Aakvik, Heckman and Vytlacil (2005) for estimating discrete choice models with binary endogenous regressors that allows for selection on unobservables. Results show that firms subject to financial constraints had a significantly higher probability of raising markups than in a counterfactual scenario without such constraints. Moreover, the estimated partial effects for the main variables are in overall accordance with the predictions from the theoretical model.