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A New Approach to Testing Marginal Productivity Theory

  • Biewen, Martin

    ()

    (University of Tuebingen)

  • Weiser, Constantin

    ()

    (University of Mainz)

We address the long standing question of whether production factors are paid their marginal products. We propose a new approach that circumvents the need to specify production functions and to compare marginal products to factor payments. Our approach is based on a simple equation that directly relates firms' profits to discrepancies between factor payments and marginal products. Our empirical application using data on manufacturing firms suggests that capital receives more than its marginal product, intermediate inputs receive less, and labor receives about its marginal product. Although there are differences with respect to firm size, deviations from marginal productivity theory generally seem limited. Our results have important implications for the distribution of income, the presence of optimizing behavior, and the existence of market power.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6113.

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Length: 55 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:iza:izadps:dp6113
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  12. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-71, September.
  13. Hellerstein, Judith K & Neumark, David & Troske, Kenneth R, 1999. "Wages, Productivity, and Worker Characteristics: Evidence from Plant-Level Production Functions and Wage Equations," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 409-46, July.
  14. Hellerstein, Judith K & Neumark, David, 1999. "Sex, Wages, and Productivity: An Empirical Analysis of Israeli Firm-Level Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(1), pages 95-123, February.
  15. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-48, May/June.
  16. Kirk White & Arpad Abraham, 2004. "The Dynamics of Plant-level Productivity in U.S. Manufacturing," Computing in Economics and Finance 2004 332, Society for Computational Economics.
  17. Robert Inklaar, 2007. "Cyclical Productivity in Europe and the United States: Evaluating the Evidence on Returns to Scale and Input Utilization," Economica, London School of Economics and Political Science, vol. 74(296), pages 822-841, November.
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  20. Verardi, Vincenzo & Wagner, Joachim, 2010. "Productivity Premia for German Manufacturing Firms Exporting to the Euro-Area and Beyond: First Evidence from Robust Fixed Effects Estimations," IZA Discussion Papers 4964, Institute for the Study of Labor (IZA).
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  23. Sang V Nguyen & Arnold P Reznek, 1990. "Returns to Scale in Small and Large U.S. Manufacturing Establishments," Working Papers 90-11, Center for Economic Studies, U.S. Census Bureau.
  24. Catherine Dehon & Marjorie Gassner & Vincenzo Verardi, 2009. "Beware of 'Good' Outliers and Overoptimistic Conclusions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(3), pages 437-452, 06.
  25. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
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  29. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
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