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Productivity, Welfare and Reallocation: Theory and Firm Level Evidence

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Author Info

  • Susanto Basu

    (Boston College
    NBER)

  • Luigi Pascali

    ()
    (Boston College)

  • Fabio Schiantarelli

    ()
    (Boston College
    IZA)

  • Luis Serven

    (World Bank)

Abstract

We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reject respectively technical change, aggregate distortions and allocative efficiency. Then, using theoretically appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 728.

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Date of creation: 23 Nov 2009
Date of revision: 12 Jul 2010
Handle: RePEc:boc:bocoec:728

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Keywords: Productivity; Welfare; Reallocation; Technology; TFP;

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  1. M. L. Weitzman, 1974. "On the Welfare Significance of National Product in Dynamic Economy," Working papers 125, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Amil Petrin & T. Kirk White & Jerome P. Reiter, 2011. "The Impact of Plant-level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth," NBER Working Papers 16700, National Bureau of Economic Research, Inc.
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