Income Fluctuations and Firm Choice

How households shift spending across firms in response to income fluctuations is an important source of firm risk. Using transaction-level data, we study how households interact with the universe of retailers following income changes. We find that income increases within and across households result in substitution towards retailers in a category that are higher quality, smaller, more profitable, and have higher labor intensity, R&D intensity, and equity betas. While not all shifts are economically large, they do not average out across retailers. Thus, retailer choice has implications for key financial and macroeconomic outcomes such as aggregate profitability and labor demand.