Productivity Dispersion, Competition and Productivity Measurement

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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 labourproductivity and total factor productivity (TFP) between firms in narrowly defined sectoral classes.The competitiveness of an industry is potentially an important factor explaining this productivitydispersion. The degree of competition has also implications for the measurement of TFP at the firmlevel. This paper firstly develops a novel control function approach to production function and TFPestimation explicitly taking imperfect competition into account. This addresses a number of issueswith the control function approach to productivity estimation. Secondly, applying this new approachto UK data it shows that productivity dispersion on average is about 50 percent higher than withstandard TFP measures. It also shows that accounting for imperfect competition matters for estimatesof the persistence of TFP. Thirdly, the paper finds a negative relationship between competition andproductivity dispersion.

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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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Find related papers by JEL classification:
C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-12-01 (All new papers)
NEP-EFF-2005-12-01 (Efficiency & Productivity)
NEP-HRM-2005-12-01 (Human Capital & Human Resource Management)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum 15/1998, Oslo University, Department of Economics.
Other versions:
- Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Blackwell Publishing, vol. 47(4), pages 451-76, December. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
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., vol. 11(4), pages 343-61, July-Aug.. [Downloadable!] (restricted)
Other versions:
- Tor Jakob Klette & Zvi Griliches, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Engogenous," NBER Working Papers 4026, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Tor Jakob Klette and Zvi Griliches, 1994. "The Inconsistency of Common Scales Estimators when Output Prices are Unobserved and Endogenous," Discussion Papers 127, Research Department of Statistics Norway.
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G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
Other versions:
- Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Z, Griliches ; Jacques Mairesse, . "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique. [Downloadable!]
Criscuolo, Chiara & Ralf Martin, 2003. "Multinationals, foreign ownership and US productivity leadership: Evidence from the UK," Royal Economic Society Annual Conference 2003 50, Royal Economic Society. [Downloadable!]
Steve Bond & Måns Söderbom, 2005. "Adjustment costs and the identification of Cobb Douglas production functions," IFS Working Papers W05/04, Institute for Fiscal Studies. [Downloadable!]
Other versions:
- 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. [Downloadable!]
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. [Downloadable!] (restricted)
Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August. [Downloadable!] (restricted)
Other versions:
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
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James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 317-341, 04. [Downloadable!] (restricted)
Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
Rachel Griffith, 1999. "Using the ARD establishment level data to look at foreign ownership and productivity in the UK," IFS Working Papers W99/06, Institute for Fiscal Studies.

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Peter K. Schott & Andrew B. Bernard & Stephen J. Redding, 2005. "Products and Productivity," NBER Working Papers 11575, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2005. "Products and Productivity," CEP Discussion Papers dp0699, Centre for Economic Performance, LSE. [Downloadable!]
- Bernard, Andrew & Redding, Stephen J & Schott, Peter, 2005. "Products and Productivity," CEPR Discussion Papers 5126, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Andrew Bernard & Stephen Redding & Peter Schott, 2008. "Products and Productivity," Working Papers 08-22, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
Chiara Criscuolo & Ralf Martin, 2005. "Multinationals and US Productivity Leadership: Evidence from Great Britain," CEP Discussion Papers dp0672, Centre for Economic Performance, LSE. [Downloadable!]
Other versions:
- 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, Directorate for Science, Technology and Industry. [Downloadable!]
- Chiara Criscuolo & Ralf Martin, 2009. "Multinationals and U.S. Productivity Leadership: Evidence from Great Britain," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 263-281, October. [Downloadable!] (restricted)
Priit Vahter, 2006. "Productivity in Estonian enterprises: the role of innovation and competition," Bank of Estonia Working Papers 2006-07, Bank of Estonia, revised 11 Dec 2006. [Downloadable!]
Anže Burger & Crt Kostevc, 2006. "In search of true productivity differences," LICOS Discussion Papers 17006, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]

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