Mohamed Diaby

Title:  Sectoral heterogeneity in returns to scale and price rigidity (with Atsuyoshi Morozumi)

Abstract:  Previous research on price-setting has shown that the degree of nominal price rigidity differs substantially across sectors. This paper proposes returns to scale as a key determinant of this sectoral heterogeneity in price rigidity. We develop a multi-sector menu-cost model with heterogeneity in returns to scale and sectoral idiosyncratic shocks, and show analytically that a sector with higher returns to scale is associated with larger price rigidity. Numerical experiments using estimated returns to scale for US manufacturing sectors suggest that the effect of returns to scale is quantitatively large. We also provide empirical evidence consistent with the theoretical prediction.