Productivity, welfare, and reallocation: theory and firm-level evidence
AbstractWe 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 total factor productivity (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, and 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 changes in welfare can be decomposed into three components that reflect, respectively, technological change, aggregate distortions, and allocative efficiency. Then, using 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 InfoPaper provided by Federal Reserve Bank of Boston in its series Working Papers with number 09-19.
Date of creation: 2009
Date of revision:
Other versions of this item:
- Basu, Susanto & Pascali, Luigi & Schiantarelli, Fabio & Serven, Luis, 2009. "Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence," IZA Discussion Papers 4612, Institute for the Study of Labor (IZA).
- Basu, Susanto & Pascali, Luigi & Schiantarelli, Fabio & Serven, Luis, 2010. "Productivity, welfare and reallocation : theory and firm-level evidence," Policy Research Working Paper Series 5226, The World Bank.
- Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2009. "Productivity, Welfare and Reallocation: Theory and Firm Level Evidence," Boston College Working Papers in Economics 728, Boston College Department of Economics, revised 12 Jul 2010.
- Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2009. "Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence," NBER Working Papers 15579, National Bureau of Economic Research, Inc.
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D90 - Microeconomics - - Intertemporal Choice - - - General
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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.:
- Weitzman, Martin L, 1976.
"On the Welfare Significance of National Product in a Dynamic Economy,"
The Quarterly Journal of Economics,
MIT Press, vol. 90(1), pages 156-62, February.
- 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.
- Amil Petrin & Jerome Reiter & Kirk White, 2011.
"The Impact of Plant-level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 3-26, January.
- Amil Petrin & Jerome Reiter & Kirk White, 2010. "Code files for "The Impact of Plant-level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth"," Computer Codes 09-247, Review of Economic Dynamics.
- Amil Petrin & T. Kirk White & Jerome P. Reiter, 2009. "The Impact of Plant-Level Resource Reallocations and Technical Progress on U.S. Macroeconomic Growth," Working Papers 09-43, Center for Economic Studies, U.S. Census Bureau.
- 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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