Natural Disasters and Markups

Conteduca, Francesco Paolo and Panon, Ludovic (2024): Natural Disasters and Markups.

Abstract

Industries are not fully geographically concentrated, so that natural disasters can affect the degree of competition in the industry, forcing firms to adapt, and have aggregate consequences. Using administrative data, we show that natural disasters in Italy lead to a persistent decline in markups of affected manufacturing firms, particularly large ones. We implement an oligopolistic competition model with idiosyncratic shocks directly on the firm-level data and quantify how markup adjustments shape aggregate productivity and welfare. Our findings suggest that markup adjustments may have mitigated the impact of the 2012 Italian earthquake on aggregate productivity by approximately 30%.

• Item Type: MPRA Paper
• Language: English
• Keywords: Natural Disasters; Markups; Oligopolistic Competition; Aggregate Productivity; Misallocation; Firm Heterogeneity
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

References

Abbate, C. C., M. G. Ladu, and A. Linarello (2017): “An Integrated Dataset of Italian Firms: 2005-2014,” Bank of Italy Occasional Paper 384.

Aghion, P., A. Bergeaud, M. Lequien, and M. J. Melitz (2022): “The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports,” Review of Economics and Statistics, 1–56.

Akgicit, U., S. Baslandze, and F. Lotti (2023): “Connecting to Power: Political Connections, Innovation, and Firm Dynamics,” Econometrica, 91, 529–564.

Alviarez, V. I., M. Fioretti, K. Kikkawa, and M. Morlacco (2023): “Two-Sided Market Power in Firm-to-Firm Trade,” National Bureau of Economic Research Working Paper 31253.

Amiti, M. and S. Heise (2024): “US Market Concentration and Import Competition,” Review of Economic Studies.

Amiti, M., O. Itskhoki, and J. Konings (2019): “International Shocks, Variable Markups, and Domestic Prices,” The Review of Economic Studies, 86, 2356–2402.

Antras, P., T. C. Fort, and F. Tintelnot (2017): “The Margins of Global Sourcing: Theory and Evidence from US Firms,” American Economic Review, 107, 2514–2564.

Arkolakis, C., F. Huneeus, and Y. Miyauchi (2023): “Spatial Production Networks,” National Bureau of Economic Research Working Paper 30954.

Atkeson, A. and A. Burstein (2008): “Pricing-to-Market, Trade Costs, and International Relative Prices,” American Economic Review, 98, 1998–2031.

Auer, R. A. and R. S. Schoenle (2016): “Market Structure and Exchange Rate Pass-Through,” Journal of International Economics, 98, 60–77.

Autor, D., D. Dorn, L. F. Katz, C. Patterson, and J. Van Reenen (2020): “The Fall of the Labor Share and the Rise of Superstar Firms,” The Quarterly Journal of Economics, 135, 645–709.

Balboni, C., J. Boehm, and M. Waseem (2023): “Firm Adaptation and Production Networks: Structural Evidence from Extreme Weather Events in Pakistan,” Unpublished Manuscript.

Baqaee, D. R. and E. Farhi (2019): “The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten’s Theorem,” Econometrica, 87, 1155–1203.

Baqaee, D. R. and E. Farhi (2020): “Productivity and Misallocation in General Equilibrium,” The Quarterly Journal of Economics, 135, 105–163.

Baqaee, D. R., E. Farhi, and K. Sangani (2024): “The Supply-Side Effects of Monetary Policy,” Journal of Political Economy, 132, 1065–1112.

Barrot, J.-N. and J. Sauvagnat (2016): “Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks,” The Quarterly Journal of Economics, 131, 1543–1592.

Bas, M. and C. Paunov (2025): “Riders on the Storm: How Do Firms Navigate Production and Market Conditions Amid El Niño?” Journal of Development Economics, 172, 103374.

Basu, S. (2019): “Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence,” Journal of Economic Perspectives, 33, 3–22.

Berman, N., P. Martin, and T. Mayer (2012): “How Do Different Exporters React to Exchange Rate Changes?” The Quarterly Journal of Economics, 127, 437–492.

Berry, S., M. Gaynor, and F. S. Morton (2019): “Do Increasing Markups Matter? Lessons from Empirical Industrial Organization,” Journal of Economic Perspectives, 33, 44–68.

Boehm, C. E., A. Flaaen, and N. Pandalai-Nayar (2019): “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake,” Review of Economics and Statistics, 101, 60–75.

Bond, S., A. Hashemi, G. Kaplan, and P. Zoch (2021): “Some Unpleasant Markup Arithmetic: Production Function Elasticities and Their Estimation from Production Data,” Journal of Monetary Economics, 121, 1–14.

Brooks, W. J., J. P. Kaboski, and Y. A. Li (2021): “Agglomeration, Misallocation, and (the Lack of) Competition,” American Economic Journal: Macroeconomics, 13, 483–519.

Burstein, A., V. M. Carvalho, and B. Grassi (2020): “Bottom-Up Markup Fluctuations,” National Bureau of Economic Research Working Paper 27958.

Burstein, A. and G. Gopinath (2014): “International Prices and Exchange Rates,” in Handbook of International Economics, Elsevier, Vol. 4, 391–451.

Caggese, A., A. Chiavari, S. Goraya, and C. Villegas-Sanchez (2024): “Climate Change, Firms, and Aggregate Productivity,” Centre for Economic Policy Research Discussion Paper 19164.

Carvalho, V. M., M. Nirei, Y. U. Saito, and A. Tahbaz-Salehi (2021): “Supply Chain Disruptions: Evidence from the Great East Japan Earthquake,” The Quarterly Journal of Economics, 136, 1255–1321.

Castro-Vincenzi, J. (2022): “Climate Hazards and Resilience in the Global Car Industry,” Unpublished Manuscript.

Castro-Vincenzi, J., G. Khanna, N. Morales, and N. Pandalai-Nayar (2024): “Weathering the Storm: Supply Chains and Climate Risk,” National Bureau of Economic Research Working Paper 32218.

Cavallo, A., E. Cavallo, and R. Rigobon (2014): “Prices and Supply Disruptions During Natural Disasters,” Review of Income and Wealth, 60, S449–S471.

Cavallo, E., S. Galiani, I. Noy, and J. Pantano (2013): “Catastrophic Natural Disasters and Economic Growth,” Review of Economics and Statistics, 95, 1549–1561.

Chatterjee, A., R. Dix-Carneiro, and J. Vichyanond (2013): “Multi-Product Firms and Exchange Rate Fluctuations,” American Economic Journal: Economic Policy, 5, 77–110.

De Loecker, J., J. Eeckhout, and S. Mongey (2021): “Quantifying Market Power and Business Dynamism in the Macroeconomy,” National Bureau of Economic Research Working Paper 28761.

De Loecker, J., J. Eeckhout, and G. Unger (2020): “The Rise of Market Power and the Macroeconomic Implications,” The Quarterly Journal of Economics, 135, 561–644.

De Loecker, J., P. K. Goldberg, A. K. Khandelwal, and N. Pavcnik (2016): “Prices, Markups, and Trade Reform,” Econometrica, 84, 445–510.

De Loecker, J. and F. Warzynski (2012): “Markups and Firm-Level Export Status,” American Economic Review, 102, 2437–71.

De Ridder, M., B. Grassi, G. Morzenti, et al. (2022): “The Hitchhiker’s Guide to Markup Estimation,” Centre for Economic Policy Research Discussion Paper 17532.

Delforge, D., V. Wathelet, R. Below, C. L. Sofia, M. Tonnelier, J. Van Loenhout, and N. Speybroeck (2023): “EM-DAT: The Emergency Events Database,” Unpublished Manuscript.

Dhyne, E., A. K. Kikkawa, and G. Magerman (2022): “Imperfect Competition in Firm-to-Firm Trade,” Journal of the European Economic Association, 20, 1933–1970.

Díez, F. J., J. Fan, and C. Villegas-Sánchez (2021): “Global Declining Competition?” Journal of International Economics, 132, 103492.

Edmond, C., V. Midrigan, and D. Y. Xu (2015): “Competition, Markups, and the Gains from International Trade,” American Economic Review, 105, 3183–3221.

Edmond, C., V. Midrigan, and D. Y. Xu (2023): “How Costly Are Markups?” Journal of Political Economy, 131, 1619–1675.

Ellison, G. and E. L. Glaeser (1997): “Geographic Concentration in US Manufacturing Industries: A Dartboard Approach,” Journal of Political Economy, 105, 889–927.

Fatica, S., G. Kátay, and M. Rancan (2022): “Floods and Firms: Vulnerabilities and Resilience to Natural Disasters in Europe,” European Commission Joint Research Centre Working Papers in Economics and Finance 2022/13.

Foster, L., J. Haltiwanger, and C. Syverson (2008): “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?” American Economic Review, 98, 394–425.

Gagnon, E. and D. López-Salido (2020): “Small Price Responses to Large Demand Shocks,” Journal of the European Economic Association, 18, 792–828.

Gaubert, C. and O. Itskhoki (2021): “Granular Comparative Advantage,” Journal of Political Economy, 129, 871–939.

Gourio, F. and L. Rudanko (2014): “Customer Capital,” Review of Economic Studies, 81, 1102–1136.

Grassi, B. (2017): “IO in I-O: Size, Industrial Organization, and the Input-Output Network Make a Firm Structurally Important,” Bocconi University Istituto Innocenzo Gasparini per la Ricerca Economica Working Paper 619.

Horvát, P. and C. Webb (2020): “The OECD STAN Database for Industrial Analysis: Sources and Methods,” OECD Science, Technology and Industry Working Papers, 2020/10.

Hsieh, C.-T. and P. J. Klenow (2009): “Misallocation and Manufacturing TFP in China and India,” The Quarterly Journal of Economics, 124, 1403–1448.

Hulten, C. R. (1978): “Growth Accounting with Intermediate Inputs,” The Review of Economic Studies, 45, 511–518.

Imbens, G. W. and J. M. Wooldridge (2009): “Recent Developments in the Econometrics of Program Evaluation,” Journal of Economic Literature, 47, 5–86.

IPCC (2021): Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

Kalemli-Özcan, Ş., B. E. Sørensen, C. Villegas-Sanchez, V. Volosovych, and S. Yeşiltaş (2024): “How to Construct Nationally Representative Firm-Level Data from the Orbis Global Database: New Facts on SMEs and Aggregate Implications for Industry Concentration,” American Economic Journal: Macroeconomics, 16, 353–374.

Mayer, T., M. J. Melitz, and G. I. Ottaviano (2021): “Product Mix and Firm Productivity Responses to Trade Competition,” Review of Economics and Statistics, 103, 874–891.

Neary, J. P. (2003): “Globalization and Market Structure,” Journal of the European Economic Association, 1, 245–271.

Noy, I. (2009): “The Macroeconomic Consequences of Disasters,” Journal of Development Economics, 88, 221–231.

Panon, L. (2022): “Labor Share, Foreign Demand and Superstar Exporters,” Journal of International Economics, 139, 103678.

Pelli, M., J. Tschopp, N. Bezmaternykh, and K. M. Eklou (2023): “In the Eye of the Storm: Firms and Capital Destruction in India,” Journal of Urban Economics, 134, 103529.

Raddatz, C. E. (2009): “The Wrath of God: Macroeconomic Costs of Natural Disasters,” World Bank Policy Research Working Paper, 5039.

Raval, D. (2023a): “A Flexible Cost Share Approach to Markup Estimation,” Economics Letters, 230, 111262.

Raval, D. (2023b): “Testing the Production Approach to Markup Estimation,” Review of Economic Studies, 90, 2592–2611.

Rossi-Hansberg, E., P.-D. Sarte, and N. Trachter (2021): “Diverging Trends in National and Local Concentration,” National Bureau of Economic Research Macroeconomics Annual, 35, 115–150.

Strobl, E. (2012): “The Economic Growth Impact of Natural Disasters in Developing Countries: Evidence from Hurricane Strikes in the Central American and Caribbean Regions,” Journal of Development Economics, 97, 130–141.

Stuart, E. A. (2010): “Matching Methods for Causal Inference: A Review and a Look Forward,” Statistical Science, 25, 1–21.

Sun, L. and S. Abraham (2021): “Estimating Dynamic Treatment Effects in Event Studies with Heterogeneous Treatment Effects,” Journal of Econometrics, 225, 175–199.

Syverson, C. (2004): “Market Structure and Productivity: A Concrete Example,” Journal of Political Economy, 112, 1181–1222.

Syverson, C. (2019): “Macroeconomics and Market Power: Context, Implications, and Open Questions,” Journal of Economic Perspectives, 33, 23–43.

World Bank (2018): World Development Report 2019: The Changing Nature of Work, The World Bank.