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Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?

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  • Lucia Foster
  • John Haltiwanger
  • Chad Syverson

Abstract

We investigate the nature of selection and productivity growth in industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. Because physical productivity is inversely correlated with price while revenue productivity is positively correlated with price, previous work linking (revenue- based) productivity to survival confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. Further, we find that young producers charge lower prices than incumbents. Thus the literature understates new producers' productivity advantages and entry's contribution to aggregate productivity growth. (JEL D24, L11, L25)

Suggested Citation

  • Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
  • Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:394-425
    Note: DOI: 10.1257/aer.98.1.394
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • 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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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? (AER 2008) in ReplicationWiki

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