Working Paper: CEPR ID: DP11058
Authors: Emanuele Forlani; Ralf Martin; Giordano Mion; Mirabelle Muuls
Abstract: We develop a novel econometric framework that simultaneously allows recovering heterogeneity in demand, quantity TFP and markups across firms while leaving the correlation among the three unrestricted. We accomplish this by explicitly introducing demand heterogeneity and by systematically exploiting assumptions used in previous productivity estimation approaches. In doing so, we provide an exact decomposition of revenue productivity in terms of the underlying heterogeneities thus bridging the gap between quantity and revenue productivity estimations. We use Belgian firms production data to quantify TFP, demand and markups and show how they are correlated with each other, across time and with measures obtained from other approaches. We also show how and to what extent our three dimensions of heterogeneity provide deeper and sharper insights on two questions: firm response to increasing import competition from China and the productivity advantage of importers.
Keywords: demand; productivity; markups; production function estimation; import competition; China; import status
JEL Codes: D24; F14; L11; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher productivity (O49) | higher markups (D49) |
| higher productivity (O49) | lower demand heterogeneity (R22) |
| higher demand appeal (R22) | lower productivity (O49) |
| increasing import competition from China (F69) | changes in quantity TFP (O49) |
| changes in quantity TFP (O49) | changes in firm revenue productivity (O49) |
| changes in quantity TFP (O49) | changes in markups (L11) |
| changes in quantity TFP (O49) | changes in production scale (D24) |
| demand heterogeneity (R22) | distinctions between importing and non-importing firms (F12) |