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Entry and Profits in an Aging Economy: The Role of Consumer Inertia

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  • Gideon Bornstein

    (Northwestern University)

Abstract

Over the past thirty years, the share of young firms in the US has declined while the share of profits in GDP has increased. This paper explores the role of consumer inertia—persistence in households’ consumption choices—as a driver of these twin phenomena. The hypothesis is that more consumer inertia makes it more difficult for entrants to establish a customer base and incentivizes large incumbents to raise markups. First, I use detailed micro data to document that consumer inertia has increased over time due to the aging of the US population. Second, I show that there is a negative relation between consumer inertia and firm formation using empirical evidence across product categories and across US states. Finally, I develop a model of entry, exit, and firm dynamics with consumer inertia. I calibrate the model using my micro estimates of consumer inertia and data on firm dynamics. According to the model, the rise in consumer inertia accounts for a substantial proportion of the twin phenomena.

Suggested Citation

  • Gideon Bornstein, 2019. "Entry and Profits in an Aging Economy: The Role of Consumer Inertia," 2019 Meeting Papers 309, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:309
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    Cited by:

    1. Michael J. Böhm & Christian Siegel, 2021. "Make Yourselves Scarce: The Effect Of Demographic Change On The Relative Wages And Employment Rates Of Experienced Workers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1537-1568, November.

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