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A Structural Method to Estimate Firm-level Capacity Utilization and Application to Chinese Heavy Industries

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  • Shengyu Liu

    (Beijing Normal University, School of Business)

  • Heng Yin

    (Renmin University of China, National Academy of Development and Strategy)

Abstract

We develop a structural model to estimate firm-specific capacity utilization (CU). Firm's productivity heterogeneity can be controlled in this framework. We demonstrate that the lowest point of short-run average total cost curve is the most suitable definition of potential output. The method is then tested by firm-level data including 15 Chinese heavy industries during 1998-2008. Intuitive findings provide strong evidence for the reliability and robustness of our estimation framework: CU keeps rising during the sample period, while slowing down after 2004; there are substantial differences in CU across industries, regions and ownerships; CU is strongly pro-cyclical; firm investment and government intervention deteriorates the problem of excess capacity.

Suggested Citation

  • Shengyu Liu & Heng Yin, 2017. "A Structural Method to Estimate Firm-level Capacity Utilization and Application to Chinese Heavy Industries," Annals of Economics and Finance, Society for AEF, vol. 18(1), pages 1-28, May.
    • Handle: RePEc:cuf:journl:y:2017:v:18:i:1:liu
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    References listed on IDEAS

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    More about this item

    Keywords

    Capacity utilization; Firm heterogeneity; Structural estimation;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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