Firm-level productivity studies: Illusions and a solution Katayama, Hajime; Lu, Shihua; Tybout, James R.

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Authors
Katayama, Hajime ; Lu, Shihua ; Tybout, James R.
Appears In
International Journal of Industrial Organization
Subjects
Business, international; Business
Audience
Trade
Summary
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijindorg.2008.11.002 Byline: Hajime Katayama (a), Shihua Lu (b), James R. Tybout (c)(d) Keywords: Productivity measurement; Differentiated products; Panel data Abstract: Applied economists often wish to measure the effects of policy changes (like trade liberalization) or managerial decisions (like R&D expenditures or exporting) on firm-level productivity patterns. But firm-level data on physical quantities of output, capital, and intermediate inputs are typically unobservable. Therefore, when constructing productivity measures, most analysts proxy these variables with real sales revenues, depreciated capital spending, and real input expenditures. Our first objective is to argue that the resultant productivity indices have little to do with technical efficiency, product quality, or contributions to social welfare. Nonetheless, they are likely to be correlated with policy shocks and managerial decisions in misleading ways. Our second objective is to develop an alternative approach to inference. We assume firms' costs and revenues reflect a Bertrand-Nash equilibrium in a differentiated product industry, as in Berry [Berry, Steven (1994) "Estimating discrete-choice models of product differentiation," Rand Journal 25(2), pp. 242-262.]. This allows us to impute each firm's unobserved marginal costs and product appeal from its observed revenues and costs. With these in hand, we calculate each firm's contribution to consumer and producer surplus. Further, we link these welfare measures to policy and managerial decisions by assuming that marginal costs and product appeal indices follow vector autoregressive (VAR) processes, conditioned on policy proxies and/or managerial choice variables. We estimate the demand system parameters and VAR parameters jointly using Bayesian techniques. Applying our methodology to panel data on Colombian paper producers, we study the relation between our welfare-based measures and conventional productivity measures. We find that the two are only weakly correlated with one another. Further, they give contrasting pictures of the relationship between firms' performances and their participation in foreign markets. One reason is that product appeal variation has little effect on standard productivity indices, but it is captured by welfare-based performance measures. Author Affiliation: (a) The University of Sydney, Australia (b) Freddie Mac, United States (c) Pennsylvania State University, United States (d) NBER, United States Article History: Received 6 February 2008; Accepted 13 November 2008 Article Note: (footnote) [star] We gratefully acknowledge the National Science Foundation for support (grant 421-18 687W0). Any opinions, findings, and conclusions or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the National Science Foundation. We have benefited from useful discussions with John Haltiwanger, Tom Holmes, Marc Melitz, Nina Pavcnik, Mark Roberts, Marc Rysman, Sofronis Clerides, and Johannes Van Biesebroeck. The working paper version of this paper appeared as .
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http://trove.nla.gov.au/work/10670
Work ID
10670

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