Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?

Abstract

There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high "productivity" businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth.

Entry, Exit and Productivity - Empirical Results for German Manufacturing Industries

“…In a first step, the mean values of productivity for the two groups of firms (continuing and exiting firms; continuing and entering firms; and surviving and 3 Note that Bartelsman and Doms (2000, p. 575) point to the fact that heterogeneity in labor productivity has been found to be accompanied by similar heterogeneity in total factor productivity in the reviewed research where both concepts are measured. Furthermore, Foster, Haltiwanger and Syverson (2005) show that productivity measures that use sales (i.e. quantities multiplied by prices) and measures that use quantities only are highly positively correlated.…”

Health Care Exceptionalism? Performance and Allocation in the US Health Care Sector

“…We use the approach of Foster, Haltiwanger and Krizan (2001) and Foster, Haltiwanger and Syverson (2008), which is itself a modification of the decomposition first derived in Baily et al (1992). Specifically, we decompose the change in the average risk-adjusted 30-day survival in a market as follows: $$\begin{array}{cc}right\Delta {\stackrel{false‒}{q}}_t& left=\underset{\text{within}}{\underbrace{\sum _{h\in C_t}{\theta }_{h,t-1}\Delta q_{h,t}}}+\underset{\text{between}}{\underbrace{\sum _{h\in C_t}(q_{h,t-1}-{\stackrel{false‒}{q}}_{t-1})\Delta {\theta }_{h,t}}}+\underset{\text{cross}}{\underbrace{\sum _{h\in C_t}\Delta q_{h,t}\Delta {\theta }_{h,t}}}\\ right& left+\underset{\text{entry}}{\underbrace{\sum _{h\in M_t}{\theta }_{h,t}(q_{h,t}-{\stackrel{false‒}{q}}_{t-1})}}-\underset{\text{exit}}{\underbrace{\sum _{h\in X_t}{\theta }_{h,t-1}(q_{h,t-1}-{\stackrel{false‒}{q}}_{t-1})}}\end{array}$$ where ${\stackrel{‒}{q}}_t$ is the market-share-weighted average 30-day survival across hospitals in the market in year t , and Δ is the difference operator; thus the left-hand side is the change in weighted average patient survival in the market between two periods.…”

Productivity and Size of the Export Market

“…Furthermore, Foster, Haltiwanger and Syverson (2005) show that productivity measures that use sales (i.e. quantities multiplied by prices) and measures that use quantities only are highly positively correlated.…”