Discussion paper
DP14114 Using Cost Minimization to Estimate Markups
De Loecker & Warzynski’s (2012) method for recovering markups from cost-minimization conditions and estimated input elasticities yields either larger or smaller markups for exporters than for non-exporters depending on the input (labor or materials) employed. We point out two difficulties. First, under imperfect competition, an Olley & Pakes (1996) style estimator for input elasticities has to account for markups. Second, with commonly used specifications of the production function, the cost-minimization conditions do not match the variation in the data. We discuss how to address these difficulties. According to our estimates, the markups of exporters and non-exporters are essentially the same.
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