In search of true productivity differences
AbstractRecent work on production functions estimation revealed that substantial biases can be introduced into the estimates when the assumption of perfect competition and price exogeneity is not satisfied in the data itself. As Klette and Griliches (1996) show applying traditional econometrics in differentiated good markets will negatively bias the scale estimates of the production function. In fact, when deflated sales are used as a proxy for output in case of differentiated good industries scale economies (and subsequently productivity) cannot be estimated independently of markups. We extend this basic framework to show that, if exporting markups are smaller than those attainable in the domestic market, the Klette-Griliches estimation procedure will tend to overestimate exporting firm markups and underestimate their productivity. In addition, we provide an estimation algorithm based on the Olley-Pakes (1996) framework that could serve to ensure unbiased estimates of exporter productivity.
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Bibliographic InfoPaper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 17006.
Length: 21 pages
Date of creation: 2006
Date of revision:
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Productivity measurement; Imperfect competition; Exporting; Foreign direct investment;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor 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
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- Fukunari Kimura & Kozo Kiyota, 2007. "Foreign-owned versus Domestically-owned Firms: Economic Performance in Japan," Review of Development Economics, Wiley Blackwell, vol. 11(1), pages 31-48, 02.
- Marian Rizov & Patrick Paul Walsh, 2005. "Linking Productivity to Trade in the Structural Estimation of Production within UK Manufacturing Industries," The Institute for International Integration Studies Discussion Paper Series iiisdp98, IIIS.
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