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 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, 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 welfare change can be decomposed into three components that reflect respectively technical change, aggregate distortions and allocative efficiency. Then, using the 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4612.
Length: 50 pages
Date of creation: Dec 2009
Date of revision:
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Other versions of this item:
- Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2009. "Productivity, welfare, and reallocation: theory and firm-level evidence," Working Papers 09-19, Federal Reserve Bank of Boston.
- 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.
- 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.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-BEC-2009-12-11 (Business Economics)
- NEP-EFF-2009-12-11 (Efficiency & Productivity)
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.:
- 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.
- 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 & 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.
- 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.
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