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How and why do Firms differ?

How do firms differ, and why do they differ even within narrowly defined industries? Using evidence from six high-tech, manufacturing industries covering a 24-year period, we show that differences in sales, materials, labor costs and capital across firms can largely be summarized by a single, firm-specific, dynamic factor, which we label efficiency in the light of our structural model. The model contains the complete system of supply and factor demand equations. It suggests that efficiency is strongly linked to profitability and firm size, but it is unrelated to labor productivity. Our second task is to understand the origin and evolution of the differences in efficiency. Among the firms established within the 24-year period that we consider, permanent differences in efficiency dominate over differences generated by firm-specific, cumulated innovations.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 320.

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Date of creation: Jul 2002
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Handle: RePEc:ssb:dispap:320
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  4. Jakob Klette & Samuel Kortum, 2002. "Innovating firms and aggregate innovation," Staff Report 300, Federal Reserve Bank of Minneapolis.
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  6. Leamer, Edward E., 1983. "Model choice and specification analysis," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 5, pages 285-330 Elsevier.
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  11. Erik Biørn & Tor Jakob Klette, 1994. "Errors in Variables and Panel Data: The Labour Demand Response to Permanent Changes in Output," Discussion Papers 125, Research Department of Statistics Norway.
  12. John Haltiwanger & C J Krizan & Lucia Foster, 1998. "Aggregate Productivity Growth: Lessons From Microeconomic Evidence," Working Papers 98-12, Center for Economic Studies, U.S. Census Bureau.
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  17. 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.
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