IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules

  • David Greenstreet
Registered author(s):

    This paper develops a sequential learning estimator of production functions and productivity dynamics for unbalanced establishment panels. Extending an idea from the literature on dynamic industry models, establishments are uncertain about their own idiosyncratic productivities and update productivity beliefs using information revealed by their production experience. The estimator relies on the structure of this iterative learning process and thereby avoids placing any restriction on establishment strategic behavior. Consequently, the estimator is suitable for comparative studies of the behavioral sources of technological change across all types of industry. Estimation of productivity dynamics and of behavioral decision rules are separated into recursive stages. Using sequential learning estimates of productivity beliefs from the first stage, decision rules for exit, investment, and innovation effort can be estimated in a second stage. A test application with four Chilean industries confirms that the estimator produces plausible estimates with small standard errors. Decision rule estimates show that productivity beliefs affect investment and exit hazards in the expected direction.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 345.

    in new window

    Date of creation: 01 Aug 2007
    Date of revision:
    Handle: RePEc:oxf:wpaper:345
    Contact details of provider: Postal:
    Manor Rd. Building, Oxford, OX1 3UQ

    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
    2. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (II): Applications of the Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number fuss1978a.
    3. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 467-492.
    4. Newey, Whitney K. & McFadden, Daniel, 1986. "Large sample estimation and hypothesis testing," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 36, pages 2111-2245 Elsevier.
    5. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    6. Muendler, Marc-Andreas, 2004. "Estimating Production Functions When Productivity Change Is Endogenous," University of California at San Diego, Economics Working Paper Series qt0w02f5tw, Department of Economics, UC San Diego.
    7. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
    8. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
    9. Jovanovic, Boyan & Rob, Rafael, 1985. "Demand-Driven Innovation and Spatial Competition Over Time," Working Papers 85-34, C.V. Starr Center for Applied Economics, New York University.
    10. Bruno, Michael, 1978. "Duality, Intermediate Inputs and Value-Added," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 2, chapter 1 McMaster University Archive for the History of Economic Thought.
    11. Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning and Statistical Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 313-350.
    12. Nadiri, M.I. & Prucha, I., 1999. "Dynamic Factor Demand Models and Productivity Analysis," Working Papers 99-09, C.V. Starr Center for Applied Economics, New York University.
    13. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
    14. D. W. Jorgenson & Z. Griliches, 1967. "The Explanation of Productivity Change," Review of Economic Studies, Oxford University Press, vol. 34(3), pages 249-283.
    15. Ariel Pakes & Michael Ostrovsky & Steve Berry, 2004. "Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Samples)," NBER Working Papers 10506, National Bureau of Economic Research, Inc.
    16. Boyan Jovanovic & Glenn MacDonald, 1993. "The Life-Cycle of a Competitive Industry," NBER Working Papers 4441, National Bureau of Economic Research, Inc.
    17. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc.
    18. Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: US Economic Growth in the Information Age," OECD Economics Department Working Papers 261, OECD Publishing.
    19. Slade, Margaret E., 1989. "Modelling stochastic and cyclical components of technical change : An application of the Kalman filter," Journal of Econometrics, Elsevier, vol. 41(3), pages 363-383, July.
    20. Christopher Budd & Christopher Harris & John Vickers, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 543-573.
    21. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    22. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200.
    23. J. Levin & P. Bajari, 2004. "Estimating Dynamic Models of Imperfect Competition," 2004 Meeting Papers 579, Society for Economic Dynamics.
    24. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    25. Eric J. Bartelsman & Mark Doms, 2000. "Understanding productivity: lessons from longitudinal microdata," Finance and Economics Discussion Series 2000-19, Board of Governors of the Federal Reserve System (U.S.).
    26. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
    27. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier.
    28. Cabral, L. & Riordan, M., 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 39, Boston University - Industry Studies Programme.
    29. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
    30. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
    31. Petrakis, Emmanuel & Roy, Santanu, 1999. "Cost-Reducing Investment, Competition, and Industry Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 381-401, May.
    32. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
    33. Jovanovic, B. & MacDonald, G.M., 1991. "Competitive Diffusion," Papers 92-08, Rochester, Business - Financial Research and Policy Studies.
    34. Charles R. Hulten, 2001. "Total Factor Productivity: A Short Biography," NBER Chapters, in: New Developments in Productivity Analysis, pages 1-54 National Bureau of Economic Research, Inc.
    35. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "A Decade Lost and Found: Mexico and Chile in the 1980s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 166-205, January.
    36. Liu, Lili, 1993. "Entry-exit, learning, and productivity change Evidence from Chile," Journal of Development Economics, Elsevier, vol. 42(2), pages 217-242, December.
    37. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
    38. Ariel Pakes & Paul McGuire, 1992. "Computing Markov perfect Nash equilibria: numerical implications of a dynamic differentiated product model," Discussion Paper / Institute for Empirical Macroeconomics 58, Federal Reserve Bank of Minneapolis.
    39. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
    40. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
    41. Fabian Lange, 2005. "The Returns to Schooling and Ability During the Early Career: Evidence on Employer Learning and Post-School Investment," 2005 Meeting Papers 253, Society for Economic Dynamics.
    42. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    43. Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 125-142.
    44. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    45. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
    46. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
    47. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    48. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
    49. Lambson, Val Eugene & Jensen, Farrell E, 1998. "Sunk Costs and Firm Value Variability: Theory and Evidence," American Economic Review, American Economic Association, vol. 88(1), pages 307-13, March.
    50. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, August.
    51. Lambson, V.E., 1989. "Industry Evolution With Sunk Costs And Uncertian Market Conditions," Working papers 8904, Wisconsin Madison - Social Systems.
    52. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    53. Susanto Basu & John G. Fernald, 1997. "Aggregate productivity and aggregate technology," International Finance Discussion Papers 593, Board of Governors of the Federal Reserve System (U.S.).
    54. Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1007-1047.
    55. Fajnzylber, Pablo & Maloney, William F. & Ribeiro, Eduardo, 2001. "Firm entry and exit, labor demand, and trade reform : evidence from Chile and Colombia," Policy Research Working Paper Series 2659, The World Bank.
    56. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
    57. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    58. 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.
    59. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    60. Charles R. Hulten, 1978. "Growth Accounting with Intermediate Inputs," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 511-518.
    61. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
    62. Steven Klepper & Elizabeth Graddy, 1990. "The Evolution of New Industries and the Determinants of Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 27-44, Spring.
    63. Lambson, Val Eugene & Jensen, Farrell E, 1995. "Sunk Costs and the Variability of Firm Value over Time," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 535-44, August.
    64. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
    65. Pakes, Ariel & McGuire, Paul, 2001. "Stochastic Algorithms, Symmetric Markov Perfect Equilibrium, and the 'Curse' of Dimensionality," Econometrica, Econometric Society, vol. 69(5), pages 1261-81, September.
    66. Gautam Gowrisankaran & Robert J. Town, 1997. "Dynamic Equilibrium in the Hospital Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 45-74, 03.
    67. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    68. Tybout, James & de Melo, Jaime & Corbo, Vittorio, 1990. "The effects of trade reforms on scale and technical efficiency : new evidence from Chile," Policy Research Working Paper Series 481, The World Bank.
    69. Roberto Alvarez & Ricardo López, 2005. "Exporting and performance: evidence from Chilean plants," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1384-1400, November.
    70. Asplund, Björn Marcus & Nocke, Volker, 2000. "Imperfect Competition, Market Size and Firm Turnover," CEPR Discussion Papers 2625, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:345. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Monica Birds)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.