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Aggregate Productivity and Heterogeneous Firms

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  • Erling Holmøy
  • Torbjørn Hægeland

    ()
    (Statistics Norway)

Abstract

It is an established fact that firms, even within narrowly defined industries, differ with respect to productivity. In this paper we analyse how observed heterogeneity in productivity is affected by endogenous producer behaviour, and to what extent shifts in firm specific productivity parameters will affect aggregate industry productivity. We find that endogenous producer behaviour and equilibrium adjustments may strongly affect observed productivity of firms and aggregate industry productivity. This makes it problematic to interpret them as structural parameters. The main lesson from the paper is that identification of such parameters should rely on structural models, in which the equilibrium determinants of observable productivity for individual firms, the distribution of output shares over firms, and the number of firms are taken into account. One may otherwise draw very misleading conclusions about changes in structural parameters from observed productivity variations, either between firms or for an industry over time.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 266.

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Date of creation: Jan 2000
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Handle: RePEc:ssb:dispap:266

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Keywords: Productivity; Heterogeneity; Aggregation;

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  1. Tor Jakob KLETTE & Astrid MATHIASSEN, 1996. "Job Creation, Job Destruction and Plant Turnover in Norvegian Manufacturing," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 97-125.
  2. Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-76, December.
  3. Krugman, Paul, 2008. "Increasing returns," Nobel Prize in Economics documents 2008-3, Nobel Prize Committee.
  4. Montagna, Catia, 1995. "Monopolistic Competition with Firm-Specific Costs," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 318-28, April.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  6. Erling Holmøy & Torbjørn Hægeland, 1997. "Aggregate Productivity Effects of Technology Shocks in a Model of Heterogeneous Firms: The Importance of Equilibrium Adjustments," Discussion Papers 198, Research Department of Statistics Norway.
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