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An Empirical Model of Growth Through Product Innovation

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  • Rasmus Lentz
  • Dale T. Mortensen

Abstract

Productivity differences across firms are large and persistent, but the evidence for worker reallocation as an important source of aggregate productivity growth is mixed. The purpose of this paper is to estimate the structure of an equilibrium model of growth through innovation designed to identify and quantify the role of resource reallocation in the growth process. The model is a version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortum (2004) extended to allow for firm heterogeneity. The data set is a panel of Danish firms that includes information on value added, employment, and wages. The model's fit is good. The estimated model implies that more productive firms in each cohort grow faster and consequently crowd out less productive firms in steady state. This selection effect accounts for 53% of aggregate growth in the estimated version of the model. Copyright 2008 The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 76 (2008)
Issue (Month): 6 (November)
Pages: 1317-1373

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Handle: RePEc:ecm:emetrp:v:76:y:2008:i:6:p:1317-1373

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  1. Javier Alvarez & Martin Browning & Mette Ejrnæs, 2002. "Modelling income processes with lots of heterogeneity," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D2-3, International Conferences on Panel Data.
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  7. Klette, T.J., 1992. "The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous," Harvard Institute of Economic Research Working Papers 1586, Harvard - Institute of Economic Research.
  8. Wright, Mark, 2004. "Firm Size Dynamics in the Aggregate Economy," Santa Cruz Department of Economics, Working Paper Series qt4rs4202s, Department of Economics, UC Santa Cruz.
  9. Dale T. Mortensen & Rasmus Lentz, 2004. "Productivity Differences and Firm Size," 2004 Meeting Papers 60, Society for Economic Dynamics.
  10. Bruce C. Fallick & Charles A. Fleischman, 2001. "The importance of employer-to-employer flows in the U.S. labor market," Finance and Economics Discussion Series 2001-18, Board of Governors of the Federal Reserve System (U.S.).
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  12. Baily, Martin Neil & Bartelsman, Eric J & Haltiwanger, John, 1996. " Downsizing and Productivity Growth: Myth or Reality?," Small Business Economics, Springer, vol. 8(4), pages 259-78, August.
  13. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  14. Rasmus Lentz & Dale T. Mortensen, 2005. "Productivity Growth And Worker Reallocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 731-749, 08.
  15. Joel L. Horowitz, 1998. "Bootstrap Methods for Covariance Structures," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 39-61.
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