Consumer Behavior and Firm Volatility
2021
Dispersion in firm‐level growth rates rises during recessions. To date, this has been explained through mechanisms on the firms' side of the economy. In this paper, I show that countercyclical dispersion can arise from changes on the demand side of the economy. Using retail data I find that during recessions demand elasticity rises, the dispersion of firms' growth rates increases, and this increase is larger in markets where the change in consumer behavior is the strongest. I develop a business cycle model with heterogeneous firms and frictions in product markets that highlights the relationship between consumer behavior and firm volatility.
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