We study cost pass-through in the U.S. automobile market using a framework that incorporates the effects of cost changes on input decisions. We find that accounting for firms' factor-market decisions significantly increases measured cost pass-through, although we reject the hypothesis of full cost pass-through and constant markups. In addition, our evidence suggests that cost shocks common to all manufacturers have a greater effect on prices than do model-specific cost shocks. Finally, we examine how pass-through varies with manufacturer nationality, finding that U.S. firm cost pass-through exceeds that of European and Asian firms.

extent to which product prices respond to exchange-rate-induced changes in costs. This research has revealed that the percentage change in the prices of imported goods is smaller than the percentage change in exchange rates of the exporting country and that price responses differ across destinations, a phenomenon termed to This finding may indicate market imperfections in international trade: for example, those that may arise in the case of segmented markets. Alternatively, these empirical facts may reflect the sale of products whose production occurs in multiple locations. When firms are able to shift their production across borders or alter their location of sourcing, their costs will not change one-for-one with home-country exchange-rate movements, and therefore their prices are unlikely to change one-for-one with exchange-rate movements. However, this possibility has not been addressed empirically in the literature on pricing to market.' This study contributes to the literature by estimating exchangerate pass-through while controlling for local production in the destination market. We focus on the U.S. automobile market, and the pricing of U.S. and Japanese firms in particular for several reasons. First, we have product-level information on pricing and content, and there is substantial variation in destination-country production across products and over time. Second, existing studies have found evidence of pricing to market and incomplete exchange-rate passthrough in automobile markets, providing a useful comparison for our results and making this an appropriate market in which to study the effect of local production on exchange-rate passthrough. Consistent with other studies, we find that Japanese firms partially pass-through Japanese cost changes to their U.S. customers. In addition, we find that this partial pass-through characterizes not only Japanese cost shocks, but cost shocks that these Japanese firms experience in their U.S. production. This finding persists in a sample that includes both U.S. and Japanese firms; automobile firms generally do not pass-through cost shocks in their entirety. Our data also show that those Japanese auto

In this paper we examine the factors that determine how firms manage large, firm-specific risks, in this case, product liability. The risk of being sued for defective products or damage from defective products poses a small probability of a great loss to the firm. Product liability exposure arises from the firm's choice of products and markets; choices that are fundamental to the firm's business strategy and that are costly to alter. Firms are unlikely to be naturally hedged by cash flows with respect to product liability risk. Cash flows will likely be negatively correlated with product liability claims since product liability claims reduce product demand and increase costs through legal expenses and claims payments.

ABSTRACT We estimate a structural model of bank portfolio lending and find that the typical U.S. community bank reduced its business lending during the global financial crisis. The decline in business credit was driven by increased risk overhang effects (consistent with a reduction in the liquidity of assets held on bank balance sheets) and by reduced loan supply elasticities suggestive of credit rationing (consistent with an increase in lender risk aversion). Nevertheless, we identify a group of strategically focused relationship banks that made and maintained higher levels of business loans during the crisis.