Working Paper: NBER ID: w11575
Authors: Peter K. Schott; Andrew B. Bernard; Stephen J. Redding
Abstract: Firms' decisions about which goods to produce are often made at a more disaggregate level than the data observed by empirical researchers. When products differ according to production technique or the way in which they enter demand, this data aggregation problem introduces a bias into standard measures of firm productivity. We develop a theoretical model of heterogeneous firms endogenously self-selecting into heterogeneous products. We characterize the bias introduced by unobserved variation in product mix across firms, and the implications of this bias for identifying firm and industry responses to exogenous policy shocks such as deregulation. More generally, we demonstrate that product switching gives rise to a richer set of industry-level dynamics than models where firm product mix remains fixed.
Keywords: Productivity; Firm Dynamics; Deregulation; Product Choice
JEL Codes: L11; D21; L60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms' decisions about which products to produce (D21) | Biases in standard productivity measures (D20) |
| Unobserved product switching (C69) | Appearance of productivity growth (O49) |
| Bias introduced by product-mix variation (C69) | Influences measured productivity dispersion across firms (O49) |
| Deregulation (L51) | Aggregate industry-level productivity growth (O47) |
| Exit of low productivity firms (J63) | Aggregate industry-level productivity growth (O47) |
| Changes in output composition among surviving firms (L19) | Aggregate industry-level productivity growth (O47) |
| Shifts in the relative importance of different product markets (F61) | Aggregate industry-level productivity growth (O47) |
| Product mix before and after policy reforms (E69) | Identification of firm productivity growth (O49) |