The transmission of microeconomic and macroeconomic shocks to firms' price and demand in product markets is the cornerstone of a large volume of macroeconomic literature. Product market frictions, by reducing the ability of demand to relocate across different suppliers, affect firms' incentives when setting prices, and therefore the pass-through of shocks to both demand and prices. In this project we plan to study the implications of product market frictions for firm level price and demand dynamics, as well as for macroeconomic dynamics. The aim is to integrate micro and macro economics, both theoretically and empirically, to a greater extent than is currently done in the literature. We will apply our tools to two main areas of interest. First, we will study how product market frictions affect the optimal pricing decision of firms, and the relocation of consumers across different suppliers. We will provide novel empirical microeconomic evidence on the relationship between price and consumer dynamics. We will build a rich but yet tractable model where product market frictions give rise to firm pricing with customer markets. The aim is to use observable statistics from the micro data to estimate the key parameters of the model and quantify the relevance of the product market frictions for firm pricing and demand dynamics. Second, we will explore the importance of product market frictions for macroeconomic dynamics. We will apply our quantified model of price and consumer dynamics to areas of macroeconomics where we expect our methodology and empirical analysis to be more relevant, both because of the types of questions addressed and because of a direct relationship with the mechanism. In particular we will focus on the role of product market frictions for business cycle fluctuations and international trade.

Nearly all activities in which the public sector is involved, from defense to transportation, from education to healthcare, require the public sector to procure works or goods from private contractors. Thus, it is crucial that the procedures through which procurement occurs be designed to avoid waste and enhance social welfare. Preventing corruption and ensuring contractor compliance with their obligations constitute primary design goals. Nevertheless, very limited evidence exists as to how different awarding methods are susceptible to corruption, and how contractors’ past reputation should be used to award new tenders. This research proposal describes three empirical projects that will advance the frontier of our understanding of the roles of corruption and reputation in procurement. Component 1 focuses on the use of reputation in contract procurement. It analyzes the evidence produced by the introduction of a vendor rating system to: i) determine whether the new system induced contractors to improve their performance, ii) determine whether performance improvements caused higher procurement costs, and iii) evaluate concerns on corruption and entry of new bidders. Component 2 focuses on corruption in public procurement. It analyzes evidence on the presence of networks of firms engaged in criminal activities in public procurement to determine: i) the extent of the phenomenon, (ii) the functioning of different awarding rules against corruption, and iii) the use of tests to detect corruption. Component 3 focuses on healthcare procurement regulations. It analyzes evidence on the public procurement of medical devices to accomplish: i) a descriptive analysis of the procurement practices across the EU, ii) an assessment of whether discretionary awarding rules are used to foster corruption or to reward contractors with better reputation, and iii) an evaluation of these procurement practices in terms of patients’ welfare.