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Solow Residuals without Capital Stocks

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  • Michael C. Burda
  • Battista Severgnini

Abstract

For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.

Suggested Citation

  • Michael C. Burda & Battista Severgnini, 2008. "Solow Residuals without Capital Stocks," SFB 649 Discussion Papers SFB649DP2008-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2008-040
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    Cited by:

    1. Jakub Growiec, 2013. "On the measurement of technological progress across countries," Bank i Kredyt, Narodowy Bank Polski, vol. 44(5), pages 467-504.
    2. Michael C Burda & Battista Severgnini, 2009. "TFP Growth in Old and New Europe," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 51(4), pages 447-466, December.
    3. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-23, February.
    4. Manca, Fabio, 2010. "Technology catch-up and the role of institutions," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1041-1053, December.
    5. Burda, Michael C & Severgnini, Battista, 2017. "Total Factor Productivity Convergence in German States since Reunification: Evidence and Explanations," CEPR Discussion Papers 12082, C.E.P.R. Discussion Papers.
    6. Michael C. Burda & Battista Severgnini, "undated". "TFP Convergence in German States since Reunification: Evidence and Explanations," SFB 649 Discussion Papers SFB649DP2015-054, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    More about this item

    Keywords

    Total factor productivity; Solow residual; generalized differences; measurement error; Malmquist index;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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