The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data
AbstractThis 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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Bibliographic InfoPaper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-05.
Length: 28 pages
Date of creation: Mar 2007
Date of revision:
Entry; Exit; Productivity; Returns to Scale;
Other versions of this item:
- Yoonsoo Lee, 2005. "The importance of reallocations in cyclical productivity and returns to scale: evidence from plant-level data," Working Paper 0509, Federal Reserve Bank of Cleveland.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-EFF-2007-04-09 (Efficiency & Productivity)
- NEP-MAC-2007-04-09 (Macroeconomics)
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