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Allocation and industry productivity: Accounting for firm turnover

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  • Maliranta, Mika
  • Määttänen, Niku

Abstract

Recent macroeconomic literature has stressed the importance of resource allocation between firms for aggregate productivity. An important issue, therefore, is how to measure allocative efficiency. We compare popular indicators of allocative efficiency, paying special attention to firm turnover. We first show how entering and exiting firms contribute to aggregate productivity and to the Olley-Pakes (OP) covariance component, which is currently the most popular measure of allocative efficiency. Our data cover essentially all firms and plants in the Finnish business sector. We then build a model of firm dynamics with endogenous turnover that is consistent with the main patterns of our empirical results and use it to test how well alternative indicators capture different allocation distortions. Our results demonstrate how and why commonly used indicators fail to capture certain distortions because of endogenous changes in firm turnover.

Suggested Citation

  • Maliranta, Mika & Määttänen, Niku, 2013. "Allocation and industry productivity: Accounting for firm turnover," ETLA Working Papers 11, The Research Institute of the Finnish Economy.
  • Handle: RePEc:rif:wpaper:11
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    References listed on IDEAS

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    1. Nathan Chappell & Adam B. Jaffe & Trinh Le, 2018. "Worker Flows, Entry and Productivity in the New Zealand Construction Industry," NBER Working Papers 24376, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    productivity; firm dynamics; reallocation;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • 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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