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Is heterogeneous capital depreciation important for estimating firm-level productivity? Evidence from Chinese manufacturing firms

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  • Cheng, Dong
  • Yu, Jian
  • Zhang, Dayong
  • Zheng, Wenping

Abstract

This paper contributes to the existing literature on estimating firm-level production functions. Using Chinese manufacturing survey data, we employ the firm-level heterogeneous capital depreciation rate to measure firms’ investment and assess its role using Olley and Pakes (1996) (OP) production function estimation technique. Although there is some ongoing debate on the econometric soundness of the OP technique, we argue quantitatively that the heterogeneous depreciation rate muffles the measurement error associated with the key input demand investment. In our sample, it significantly narrows the gap of total factor productivity (TFP) estimates between the OP technique and a state-of-the-art estimation method that works without investment. We further reveal that the improved performance primarily originates from the dynamic evolution in the distribution of the capital depreciation rate.

Suggested Citation

  • Cheng, Dong & Yu, Jian & Zhang, Dayong & Zheng, Wenping, 2020. "Is heterogeneous capital depreciation important for estimating firm-level productivity? Evidence from Chinese manufacturing firms," Research in International Business and Finance, Elsevier, vol. 52(C).
  • Handle: RePEc:eee:riibaf:v:52:y:2020:i:c:s0275531919308530
    DOI: 10.1016/j.ribaf.2019.101146
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    More about this item

    Keywords

    Production function; Productivity; Capital depreciation; Olley–Pakes; Measurement error;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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