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When Industries Become More Productive, Do Firms?: Investigating Productivity Dynamics

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  • Levinsohn, J.
  • Petrin, A.

Abstract

This paper investigates two explanations for why industries might become more productive over time. The first explanation, termed the real productivity case,' is one in which firms become more productive and this leads to more productive industries. The second explanation, termed the rationalization case,' is one in which firm productivity is constant, but productive firms expand while less productive firms either shrink or exit. Each case has very different implications for factor markets, long term growth prospects, and public policy regarding productivity. Further, one can only distinguish between these two cases with plant- or firm-level data. We investigate the empirical relevance of the two cases using the Chilean manufacturing census. We find that the rationalization case explains much of the measured increase in industry productivity. When industry productivity fails, the rationalization case appears much less important. We also contribute to the applied econometric literature on productivity estimation as we show that the value-added production function is especially well-suited to a simple extension of recent methods developed by Oiley and Pakes.

Suggested Citation

  • Levinsohn, J. & Petrin, A., 1999. "When Industries Become More Productive, Do Firms?: Investigating Productivity Dynamics," Working Papers 445, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:445
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    Cited by:

    1. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, July.
    2. Mohamed Ali Marouani & Rim Mouelhi, 2014. "Employment Growth, Productivity and Jobs reallocations in Tunisia: A Microdata Analysis," Working Papers DT/2014/13, DIAL (Développement, Institutions et Mondialisation).
    3. Kee, Hiau Looi & Hoekman, Bernard, 2007. "Imports, entry and competition law as market disciplines," European Economic Review, Elsevier, pages 831-858.
    4. Kraay, Aart & Raddatz, Claudio, 2007. "Poverty traps, aid, and growth," Journal of Development Economics, Elsevier, pages 315-347.
    5. Raphael Bergoeing & Andrés Hernando & Andrea Repetto, 2003. "Idiosyncratic Productivity Shocks and Plant-Level Heterogeneity," Documentos de Trabajo 173, Centro de Economía Aplicada, Universidad de Chile.
    6. Paul Conway & Adrian Orr, 2000. "The process of economic growth in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, March.
    7. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, pages 569-594.
    8. José Miguel Benavente & Christian Ferrada, 2004. "Probability of Survival of New Manufacturing Plants: the case of Chile," Econometric Society 2004 Latin American Meetings 305, Econometric Society.
    9. Katariina Hakkala, 2006. "Corporate restructuring and labor productivity growth," Industrial and Corporate Change, Oxford University Press, pages 683-714.
    10. 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.
    11. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
    12. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, pages 93-119.
    13. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, pages 569-594.
    14. James Bergin & Dan Bernhardt, 2008. "Industry dynamics with stochastic demand," RAND Journal of Economics, RAND Corporation, pages 41-68.
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    16. Eric J. Bartelsman & John Haltiwanger & Stefano Scarpetta, 2004. "Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries," Tinbergen Institute Discussion Papers 04-114/3, Tinbergen Institute.
    17. Megan Claridge & Sarah Box, 2000. "Economic Integration, Sovereignty and Identity: New Zealand in the Global Economy," Treasury Working Paper Series 00/22, New Zealand Treasury.
    18. Lundin, Nannan & Sjöholm, Fredrik & Ping, He & Qian, Jinchang, 2007. "Technology Development and Job Creation in China," Working Paper Series 697, Research Institute of Industrial Economics.
    19. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    20. Félix, Sónia & Portugal, Pedro, 2016. "Labor Market Imperfections and the Firm's Wage Setting Policy," IZA Discussion Papers 10241, Institute for the Study of Labor (IZA).
    21. Amil Petrin & James Levinsohn, 2005. "Measuring Aggregate Productivity Growth Using Plant-Level Data," Working Papers 552, Research Seminar in International Economics, University of Michigan.
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    More about this item

    Keywords

    INDUSTRY ; PRODUCTIVITY ; TRADE LIBERALIZATION;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • 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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