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Firm-level productivity studies: Illusions and a solution

  • Katayama, Hajime
  • Lu, Shihua
  • Tybout, James R.

Applied economists often wish to measure the effects of policy changes (like trade liberalization) or managerial decisions (like R&D expenditures or exporting) on firm-level productivity patterns. But firm-level data on physical quantities of output, capital, and intermediate inputs are typically unobservable. Therefore, when constructing productivity measures, most analysts proxy these variables with real sales revenues, depreciated capital spending, and real input expenditures. Our first objective is to argue that the resultant productivity indices have little to do with technical efficiency, product quality, or contributions to social welfare. Nonetheless, they are likely to be correlated with policy shocks and managerial decisions in misleading ways. Our second objective is to develop an alternative approach to inference. We assume firms' costs and revenues reflect a Bertrand-Nash equilibrium in a differentiated product industry, as in Berry [Berry, Steven (1994) "Estimating discrete-choice models of product differentiation," Rand Journal 25(2), pp. 242-262.]. This allows us to impute each firm's unobserved marginal costs and product appeal from its observed revenues and costs. With these in hand, we calculate each firm's contribution to consumer and producer surplus. Further, we link these welfare measures to policy and managerial decisions by assuming that marginal costs and product appeal indices follow vector autoregressive (VAR) processes, conditioned on policy proxies and/or managerial choice variables. We estimate the demand system parameters and VAR parameters jointly using Bayesian techniques. Applying our methodology to panel data on Colombian paper producers, we study the relation between our welfare-based measures and conventional productivity measures. We find that the two are only weakly correlated with one another. Further, they give contrasting pictures of the relationship between firms' performances and their participation in foreign markets. One reason is that product appeal variation has little effect on standard productivity indices, but it is captured by welfare-based performance measures.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 3 (May)
Pages: 403-413

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Handle: RePEc:eee:indorg:v:27:y:2009:i:3:p:403-413
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  2. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
  3. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
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  7. Lahiri, Kajal & Gao, Jian, 2002. "Bayesian analysis of nested logit model by Markov chain Monte Carlo," Journal of Econometrics, Elsevier, vol. 111(1), pages 103-133, November.
  8. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
  9. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  10. Klette, T.J., 1992. "The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous," Harvard Institute of Economic Research Working Papers 1586, Harvard - Institute of Economic Research.
  11. Sofronis K. Clerides & Saul Lach & James R. Tybout, 1998. "Is Learning By Exporting Important? Micro-Dynamic Evidence From Colombia, Mexico, And Morocco," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 903-947, August.
  12. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  13. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
  14. Poirier, Dale J., 1996. "A Bayesian analysis of nested logit models," Journal of Econometrics, Elsevier, vol. 75(1), pages 163-181, November.
  15. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
  16. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  17. Aitken, Brian & Harrison, Ann & DEC, 1994. "Do domestic firms benefit from foreign direct investment? Evidence from panel data," Policy Research Working Paper Series 1248, The World Bank.
  18. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  19. Blomstrom, Magnus & Kokko, Ari, 1997. "How foreign investment affects host countries," Policy Research Working Paper Series 1745, The World Bank.
  20. Kraay, Aart & Soloaga, Isidro & Tybout, James, 2002. "Product quality, productive efficiency, and international technology diffusion : evidence from plant-level panel data," Policy Research Working Paper Series 2759, The World Bank.
  21. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  22. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
  23. Griliches, Zvi & Regev, Haim, 1995. "Firm productivity in Israeli industry 1979-1988," Journal of Econometrics, Elsevier, vol. 65(1), pages 175-203, January.
  24. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  25. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
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