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Dynamic Olley-Pakes Productivity Decomposition with Entry and Exit

  • Marc J. Melitz
  • Sašo Polanec

In this paper, we propose an extension of the productivity decomposition method developed by Olley & Pakes (1996). This extension provides an accounting for the contributions of both firm entry and exit to aggregate productivity changes. It breaks down the contribution of surviving firms into a component accounting for changes in the firm-level distribution of productivity and another accounting for market share reallocations among those firms - following the same methodology as the one proposed by Olley & Pakes (1996). We argue that the other decompositions that break-down aggregate productivity changes into these same four components introduce some biases in the measurement of the contributions of entry and exit. We apply our proposed decomposition to the large measured increases of productivity in Slovenian manufacturing during the 1995-2000 period and contrast our results with those of other decompositions. We find that, over a 5-year period, the measurement bias associated with entry and exit is substantial, accounting for up to 10 percentage points of aggregate productivity growth. We also find that market share reallocations among surviving firms played a much more important role in driving aggregate productivity changes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18182.

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Date of creation: Jun 2012
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Handle: RePEc:nbr:nberwo:18182
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  1. Griliches, Zvi & Regev, Haim, 1995. "Firm productivity in Israeli industry 1979-1988," Journal of Econometrics, Elsevier, vol. 65(1), pages 175-203, January.
  2. Amil Petrin & James Levinsohn, 2005. "Measuring Aggregate Productivity Growth Using Plant-Level Data," Working Papers 552, Research Seminar in International Economics, University of Michigan.
  3. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  4. Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
  5. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  6. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-34, February.
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