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Productivity Dispersion, Competition and Productivity Measurement

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  • Ralf Martin

Abstract

A startling fact of firm level productivity analysis is the large and persistent differences in both labour productivity and total factor productivity (TFP) between firms in narrowly defined sectoral classes. The competitiveness of an industry is potentially an important factor explaining this productivity dispersion. The degree of competition has also implications for the measurement of TFP at the firm level. This paper firstly develops a novel control function approach to production function and TFP estimation explicitly taking imperfect competition into account. This addresses a number of issues with the control function approach to productivity estimation. Secondly, applying this new approach to UK data it shows that productivity dispersion on average is about 50 percent higher than with standard TFP measures. It also shows that accounting for imperfect competition matters for estimates of the persistence of TFP. Thirdly, the paper finds a negative relationship between competition and productivity dispersion.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0692.

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Date of creation: May 2005
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Handle: RePEc:cep:cepdps:dp0692

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Productivity Measurement; Imperfect Competition; Productivity Dispersion; Productivity Spread;

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  1. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(4), pages 343-61, July-Aug..
  2. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, Econometric Society, vol. 64(6), pages 1263-97, November.
  3. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
  4. Criscuolo, Chiara & Ralf Martin, 2003. "Multinationals, foreign ownership and US productivity leadership: Evidence from the UK," Royal Economic Society Annual Conference 2003, Royal Economic Society 50, Royal Economic Society.
  5. Haijime Katayama & Shihua Lu & James Tybout, 2003. "Why Plant-Level Productivity Studies are Often Misleading, and an Alternative Approach to Interference," NBER Working Papers 9617, National Bureau of Economic Research, Inc.
  6. Stephen Bond & Måns Söderbom, 2005. "Adjustment Costs and the Identification of Cobb Douglas Production Functions," Economics Papers 2005-W04, Economics Group, Nuffield College, University of Oxford.
  7. Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum, Oslo University, Department of Economics 15/1998, Oslo University, Department of Economics.
  8. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  9. Jacques Mairesse & Bronwyn H. Hall, 1996. "Estimating the Productivity of Research and Development: An Exploration of GMM Methods Using Data on French & United States Manufacturing Firms," NBER Working Papers 5501, National Bureau of Economic Research, Inc.
  10. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  11. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  12. Rachel Griffith, 1999. "Using the ARD establishment level data to look at foreign ownership and productivity in the UK," IFS Working Papers, Institute for Fiscal Studies W99/06, Institute for Fiscal Studies.
  13. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(1), pages 53-82, January.
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Cited by:
  1. Richard Harris & John Moffat, 2012. "Total Factor Productivity Growth in Local Economic Partnership Regions in Britain, 1997-2008," SERC Discussion Papers, Spatial Economics Research Centre, LSE 0112, Spatial Economics Research Centre, LSE.
  2. Chiara Criscuolo & Ralf Martin, 2004. "Multinationals and U.S. Productivity Leadership: Evidence from Great Britain," OECD Science, Technology and Industry Working Papers 2004/5, OECD Publishing.
  3. Priit Vahter, 2006. "Productivity in Estonian enterprises: the role of innovation and competition," Bank of Estonia Working Papers, Bank of Estonia 2006-07, Bank of Estonia, revised 11 Dec 2006.
  4. Nick Bloom & Christos Genakos & Ralf Martin & Raffaella Sadun, 2008. "Modern management: good for the environment or just hot air?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 28505, London School of Economics and Political Science, LSE Library.
  5. Bernard, Andrew & Redding, Stephen J & Schott, Peter, 2005. "Products and Productivity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5126, C.E.P.R. Discussion Papers.
  6. Ralf Martin, 2010. "Why is the US so Energy Intensive? Evidence from US Multinationals in the UK," CEP Discussion Papers dp0965, Centre for Economic Performance, LSE.
  7. Kılınç, Umut, 2014. "Estimating entrants' productivity when prices are unobserved," Economic Modelling, Elsevier, Elsevier, vol. 38(C), pages 640-647.
  8. Tapas Mishra & Bazoumana Ouattara & Mamata Parhi, 2011. "A Note on Shock Persistence in Total Factor Productivity Growth," Economics Bulletin, AccessEcon, vol. 31(2), pages 1869-1893.

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