2026 General Seminar - Andrés Bellofatto (UQ)

Title: On Markups, Borrowing Constraints and Firm Size

by Andrés Bellofatto, Begoña Domínguez, Patrick Elkignton, Alicia Rambaldi

Abstract:  This paper studies the relationship between firm-level borrowing constraints and markups. Using comprehensive administrative data on businesses operating in Australia, we proxy borrowing-constraint tightness by combining managers’ survey responses on financial decision-making, and firms’ balance sheet data from business income tax returns. Within narrowly defined industries, we find that firms facing tighter borrowing constraints tend to charge considerably higher markups. This relationship is negatively related to firm size: at the median of the size distribution, constrained firms set markups about 3% higher than unconstrained firms, but such difference can exceed 10% among the smallest firms. To interpret these findings, we develop a model in which working capital requirements generate a positive link between borrowing constraints and markups. Consistent with our theory, we further show empirically that higher working capital requirements substantially amplify the pass-through from borrowing constraints to markups.