Bias in Reduced-Form Estimates of Pass-through

Alexander MacKay, Nathan H. Miller, Marc Remer, and Gloria Sheu, EAG 14-1, February 2014
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We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may frustrate inference.

Updated July 24, 2015

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