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The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data

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  • Yoonsoo Lee

Abstract

This paper provides new evidence that estimates based on aggregate data will understate the true procyclicality of total factor productivity. I examine plant-level data and show that some industries experience countercyclical reallocations of output shares among firms at different points in the business cycle, so that during recessions, less productive firms produce less of the total output, but during expansions they produce more. These reallocations cause overall productivity to rise during recessions, and do not reflect the actual path of productivity of a representative firm over the course of the business cycle. Such an effect (sometimes called the cleansing effect of recessions) may also bias aggregate estimates of returns to scale and help explain why decreasing returns to scale are found at the industry-level data.

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File URL: ftp://ftp2.census.gov/ces/wp/2007/CES-WP-07-05.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-05.

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Length: 28 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:cen:wpaper:07-05

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Keywords: Entry; Exit; Productivity; Returns to Scale;

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Cited by:
  1. Albert Banal‐Estañol & Paul Heidhues & Rainer Nitsche & Jo Seldeslachts, 2010. "Screening And Merger Activity," Journal of Industrial Economics, Wiley Blackwell, vol. 58(4), pages 794-817, December.

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