Working Paper: CEPR ID: DP13592
Authors: David Rezza Baqaee; Emmanuel Farhi
Abstract: This paper discusses two simple decompositions for aggregate productivity analysis in the presence of distortions and in general equilibrium. The first is a generalization of Baqaee and Farhi (2017) and the second is due to Petrin and Levinsohn (2012). In the process, we propose a new "distorted'' Solow residual which, contrary to the traditional Solow residual, accurately measures changes in aggregate productivity in disaggregated economies with distortions. These formulas apply to any collection of producers ranging from one isolated producer to an industry or to an entire economy. They can be useful for empiricists and theorists alike. Potential applications of these formulas include: (1) decomposing aggregate productivity into its microeconomic sources, separating technical and allocative efficiency; (2) aggregating icroeconomic estimates (for example, from natural experiments) to assess macroeconomic effects; (3) constructing and interpreting aggregate counterfactuals. Despite their simplicity, the formulas are general, allowing for production networks, multi-product firms, and non-constant returns. They are also entirely nonparametric. They only assume market clearing and cost minimization.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in aggregate output (E23) | contributions from external inputs (O36) |
| changes in aggregate output (E23) | contributions from technical efficiency (O49) |
| changes in aggregate output (E23) | contributions from allocative efficiency (D61) |
| increases in external inputs (O49) | increases in aggregate output (E23) |
| markups or wedges (D43) | alters efficiency of resource allocation (D61) |
| alters efficiency of resource allocation (D61) | impacts overall productivity (O49) |