Firm-Level Dispersion in Productivity: Is the Devil in the Details?

Abstract

We explore current interpretations of firm-level dispersion in revenue-based productivity measures. Since revenue function estimates using proxy methods differ from factor elasticities, the residual emerging from this method remains a combination of demand and technical effciency shocks, and is not equal to the concept of revenue productivity that plays an important role in recent literature on misallocation. This has implications for applications where measured revenue productivity dispersion is used as an indicator of misallocation. Our empirical evidence suggests, under iso-elastic demand, measured dispersion may indicate either distortions or variation in demand shocks and technical effciency or all of the above.

Measuring Productivity Dispersion

“…This demand structure, together with Cobb-Douglas technology, though admittedly restrictive, have the analytical advantage that it implies a closed form solution for TFPR, regardless of assumptions about returns to scale (see Foster et al (2016b) for details). In addition, the revenue function will include a measure of industry-level output, or aggregate demand implying that the joint estimation of demand parameters and revenue function coefficients allows the identification of factor elasticities and returns to scale.…”

“…Recently, several studies attempted to exploit and explain the within-country variation in dispersion. In perhaps the most popular area of application, cross-country differences in the dispersion of revenue productivity measures are associated with the degree of misallocation (see Hsieh and Klenow (2009), Bartelsman et al (2013) and Foster et al (2016b)). …”

“…Yet another area of inquiry is related to the interpretation of dispersion in revenue productivity. Based on the insights in Hsieh and Klenow (2009)-that under certain assumptions about technology and demand, dispersion in productivity reflects market distortions-dispersion in a particular revenue productivity measure has been used to create indicators of misallocation (a recent example is Foster et al (2016b)). …”

Fear the walking dead

“…But it is particularly important to understand how zombie prevalence affects the most productive firms within each sector. Therefore, following Foster et al (2016) and Decker et al (2016) and the application to zombies in Adalet McGowan et al (2017a), we assess how zombie congestion affects the effective resource allocation towards the most productive companies. While firms with higher productivity are expected to grow faster, shrinking the least productive and driving them out of the market, this process may be adversely affected by an increased prevalence of zombies.…”

Customer‐employee substitution: Evidence from gasoline stations

“…In this context, Haltiwanger () argues that a revenue measure of productivity is preferable to a physical measure of productivity when firms do not have market power but produce goods of differential quality, because the prices embedded in the revenue‐based measure implicitly adjust for differences in quality across firms. For a related discussion, see also Foster, Grim, Haltiwanger, and Wolf ().…”