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Why is Productivity Correlated with Competition?

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  • Matthew Backus

    (Cornell University)

Abstract

The positive correlation between average establishment-level productivity and measures of competitiveness is oft-observed but still controversial, despite its implications for competition policy and its centrality in the debate over the origins of the productivity effect of trade liberalization. This paper considers two competing explanations for the existence of the correlation: a causal relationship between competition and productivity, historically known as "X-inefficiency", and a market-level dynamic selection story that has gained ground in the trade literature. This paper demonstrates that the two effects are econometrically separable. Two empirical approaches are developed: a regression of quantiles and a selection correction procedure derived from a model of Markov-perfect industry dynamics. Both methods are applied to the ready- mix concrete industry, and results suggest that the correlation is almost exclusively attributable to X-inefficiency.

Suggested Citation

  • Matthew Backus, 2014. "Why is Productivity Correlated with Competition?," 2014 Meeting Papers 726, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:726
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    Cited by:

    1. Duso, Tomaso & Seldeslachts, Jo & Szucs, Florian, 2019. "The Impact of Competition Policy Enforcement on the Functioning of EU Energy Markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 40(01), pages 97-120.
    2. Daniel Ferreira & Thomas Kittsteiner, 2016. "When Does Competition Foster Commitment?," Management Science, INFORMS, vol. 62(11), pages 3199-3212, November.
    3. Denis Chetverikov & Bradley Larsen & Christopher Palmer, 2016. "IV Quantile Regression for Group‐Level Treatments, With an Application to the Distributional Effects of Trade," Econometrica, Econometric Society, vol. 84, pages 809-833, March.
    4. Macchiavello, Rocco & Menzel, Andreas & Rabbani, Atonu & Woodruff, Christopher, 2015. "Challenges of Change: An Experiment Training Women to Manage in the Bangladeshi Garment Sector," Economic Research Papers 269725, University of Warwick - Department of Economics.

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