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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 Statistics Norway, Research Department in its series Discussion Papers with number 320.

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Date of creation: Jul 2002
Date of revision:
Handle: RePEc:ssb:dispap:320
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  1. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth. Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
  2. Erik Biørn & Tor Jakob Klette, 1994. "Errors in Variables and Panel Data: The Labour Demand Response to Permanent Changes in Output," Discussion Papers 125, Statistics Norway, Research Department.
  3. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
  4. 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.
  5. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
  6. Friedman, Milton, 1992. "Do Old Fallacies Ever Die?," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 2129-32, December.
  7. Tor Jakob Klette & Zvi Griliches, 1998. "Empirical Patterns of Firm Growth and R&D Investment: A QuUality LadderModel Interpretation," NBER Working Papers 6753, National Bureau of Economic Research, Inc.
  8. Quah, Danny, 1993. "Galton's Fallacy and Tests of the Convergence Hypothesis," CEPR Discussion Papers 820, C.E.P.R. Discussion Papers.
  9. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
  10. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  11. Jakob Klette & Samuel Kortum, 2002. "Innovating firms and aggregate innovation," Staff Report 300, Federal Reserve Bank of Minneapolis.
  12. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  13. repec:oup:restud:v:59:y:1992:i:1:p:125-42 is not listed on IDEAS
  14. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  15. Boyan Jovanovic & Peter L. Rousseau, 2001. "Vintage Organization Capital," NBER Working Papers 8166, National Bureau of Economic Research, Inc.
  16. J, A, Abowd & Bruno Crépon & Francis Kramarz, 1997. "Moment Estimation with Attrition," Working Papers 97-35, Centre de Recherche en Economie et Statistique.
  17. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  18. Tor Jakob Klette & Zvi Griliches, 1997. "Empirical Patters of Firm Growth and R&D Investment: A Quality Ladder Model Interpretation," Harvard Institute of Economic Research Working Papers 1795, Harvard - Institute of Economic Research.
  19. 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.
  20. repec:adr:anecst:y:1999:i:55-56:p:05 is not listed on IDEAS
  21. Heckman, James J, 1991. "Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity," American Economic Review, American Economic Association, vol. 81(2), pages 75-79, May.
  22. Milgrom, Paul & Roberts, John, 1995. "The Economics of Modern Manufacturing: Reply," American Economic Review, American Economic Association, vol. 85(4), pages 997-99, September.
  23. Erik Brynjolfsson & Lorin M. Hitt, 2000. "Beyond Computation: Information Technology, Organizational Transformation and Business Performance," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 23-48, Fall.
  24. 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.
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