Energy Prices, Markups, and Productivity

This paper studies how input-cost shocks affect firms. Using a panel of Chilean manufacturing plants, in this paper, I study how electricity price and energy-price induced variations in average variable cost affect firms’ markups and productivity. The first part presents a novel structural estimation method to compute markups and productivity. The technique overcomes potential circularity issues and violations to the monotonicity assumption in the proxy-variable technique. The second part studies the relationship between energy prices, markups, and productivity using an instrumental variables research design. I first explore a natural experiment, the 2004 Argentine crisis, as a potential source of exogenous variations for electricity prices. Then, I complement the research design by instrumenting for average variable cost constructing shift-share type instruments from variations in energy prices. Results suggest that a relevant channel through which firms adjust energy shocks is flexible markups. Estimates suggest that energy cost-shock that increase in 10 percent average variable costs lead to 3 percent decrease in markups. Conversely, productivity does not seem to be affected by those short-term shocks.