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In search of true productivity differences

Author

Listed:
  • Anze Burger
  • Crt Kostevc

Abstract

Recent work on production functions estimation revealed that substantial biases can be introduced into the estimates when the assumption of perfect competition and price exogeneity is not satisfied in the data itself. As Klette and Griliches (1996) show applying traditional econometrics in differentiated good markets will negatively bias the scale estimates of the production function. In fact, when deflated sales are used as a proxy for output in case of differentiated good industries scale economies (and subsequently productivity) cannot be estimated independently of markups. We extend this basic framework to show that, if exporting markups are smaller than those attainable in the domestic market, the Klette-Griliches estimation procedure will tend to overestimate exporting firm markups and underestimate their productivity. In addition, we provide an estimation algorithm based on the Olley-Pakes (1996) framework that could serve to ensure unbiased estimates of exporter productivity.

Suggested Citation

  • Anze Burger & Crt Kostevc, 2006. "In search of true productivity differences," LICOS Discussion Papers 17006, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  • Handle: RePEc:lic:licosd:17006
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    File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp170.pdf
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    References listed on IDEAS

    as
    1. Robert E. Baldwin & Robert E. Lipsey & J. David Richards, 1998. "Geography and Ownership as Bases for Economic Accounting," NBER Books, National Bureau of Economic Research, Inc, number bald98-1.
    2. Marian Rizov & Patrick Paul Walsh, 2005. "Linking Productivity to Trade in the Structural Estimation of Production within UK Manufacturing Industries," The Institute for International Integration Studies Discussion Paper Series iiisdp98, IIIS.
    3. Phan Minh Ngoc & Eric D. Ramstetter, 2004. "Foreign Multinationals and Local Firms in Vietnam's Economic Transition ," Asian Economic Journal, East Asian Economic Association, vol. 18(4), pages 371-404, December.
    4. Van Biesebroeck, Johannes, 2005. "Exporting raises productivity in sub-Saharan African manufacturing firms," Journal of International Economics, Elsevier, vol. 67(2), pages 373-391, December.
    5. Fukunari Kimura & Kozo Kiyota, 2007. "Foreign-owned versus Domestically-owned Firms: Economic Performance in Japan," Review of Development Economics, Wiley Blackwell, vol. 11(1), pages 31-48, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Productivity measurement; Imperfect competition; Exporting; Foreign direct investment;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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