Targeting Government Aid during Covid-19: The issue of fixed costs

Jozef Gerard L Konings, Yannick Bormans, Balazs Murakozy

Research output: Working paperDiscussion paper

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Abstract

Many governments implement policies to support generally healthy firms to survive the COVID-19 crisis in a targeted way. For such policies, it is crucial to understand how profitability changes during the crisis and in which industries inefficient exit is most likely. Earlier research produced ambiguous results about the relationship between crises and firm-level price-cost margins. This paper argues that this mainly results from the fact that the two components of price-cost margins, the part needed to cover fixed cost and the excess profit margin, move in different directions during an economic crisis. We illustrate this by relying on Belgian firm level accounts from 1985 until 2014 and applying a novel methodology (Abraham, Bormans, Konings & Roeger, 2020), which takes into account fixed costs when estimating the price-cost margins. We show that, indeed, the fixed cost share is countercyclical while excess profitability is procyclical. These insights allow to identify and target industries, in which the case for support is strong, based on three criteria: high operating revenue losses, high fixed costs (as a % of revenue) and a low profitability as inefficient exit is more likely in these industries.
Original languageEnglish
Publication statusPublished - 2021

Publication series

NameVIVES Discussion Paper
No.91

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