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Income Fluctuations and Firm Choice

Published online by Cambridge University Press:  06 July 2020

Scott R. Baker
Affiliation:
Northwestern University
Brian Baugh
Affiliation:
University of Nebraska bbaugh2@unl.edu
Lorenz Kueng
Affiliation:
Università della Svizzera Italiana, Swiss Finance Institute, Northwestern University lorenz.kueng@usi

Abstract

How households shift spending across firms in response to income fluctuations is an important source of firm risk. Using transaction-level data, we study how households interact with the universe of retailers following income changes. We find that income increases within and across households result in substitution toward retailers in a category that are higher quality; smaller; more profitable; and have higher labor intensity, research and development (R&D) intensity, and equity betas. Although not all shifts are economically large, they do not average out across retailers. Thus, retailer choice has implications for key financial and macroeconomic outcomes, such as aggregate profitability and labor demand.

Type
Research Article
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington

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Footnotes

We are very grateful to Jarrad Harford (the editor) for guidance and detailed comments and an anonymous referee for useful suggestions. We would like to thank seminar participants at Northwestern, the Hoover Institution, the International Institute of Public Finance (IIPF), Universidad Catolica de Chile, and the Copenhagen Workshop on New Consumption Data for helpful feedback.

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