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The Cyclicality of Productivity Dispersion

  • Matthias Kehrig

Using plant-level data, I show that the dispersion of total factor productivity in U.S. durable manufacturing is greater in recessions than in booms. This cyclical property of productivity dispersion is much less pronounced in non-durable manufacturing. In durables, this phenomenon primarily reflects a relatively higher share of unproductive firms in a recession. In order to interpret these findings, I construct a business cycle model where production in durables requires a fixed input. In a boom, when the market price of this fixed input is high, only more productive firms enter and only more productive incumbents survive, which results in a more compressed productivity distribution. The resulting higher average productivity in durables endogenously translates into a lower average relative price of durables. Additionally, my model is consistent with the following business cycle facts: procyclical entry, procyclical aggregate total factor productivity, more procyclicality in durable than non-durable output, procyclical employment and countercyclicality in the relative price of durables and the cross section of stock returns.

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File Function: First version, 2011
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 11-15.

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Length: 67 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:cen:wpaper:11-15
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