Wednesday, August 24, 2016

Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing

Sharat Ganapati (Dept. of Economics, Yale University) ; Joseph S. Shapiro (Cowles Foundation, Yale University) ; and Reed Walker (University of California, Berkeley, IZA, & NBER) examine Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing.

ABSTRACT: This paper studies how increases in energy input costs for production are split between consumers and producers via changes in product prices (i.e., pass-through). We show that in markets characterized by imperfect competition, marginal cost pass-through, a demand elasticity, and a price-cost markup are sucient to characterize the relative change in welfare between producers and consumers due to a change in input costs. We find that increases in energy prices lead to higher plant-level marginal costs and output prices but lower markups. This suggests that marginal cost pass-through is incomplete, with estimates centered around 0.7. Our confidence intervals reject both zero pass-through and complete pass-through. We find heterogeneous incidence of changes in input prices across industries, with consumers bearing a smaller share of the burden than standards methods suggest.

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