A Structural Method to Estimate Firm-level Capacity Utilization and Application to Chinese Heavy Industries

Shengyu Liu () and Heng Yin ()
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Shengyu Liu: Beijing Normal University, School of Business
Heng Yin: Renmin University of China, National Academy of Development and Strategy

Annals of Economics and Finance, 2017, vol. 18, issue 1, 1-28

Abstract: We develop a structural model to estimate firm-specific capacity utilization (CU). Firm's productivity heterogeneity can be controlled in this framework. We demonstrate that the lowest point of short-run average total cost curve is the most suitable definition of potential output. The method is then tested by firm-level data including 15 Chinese heavy industries during 1998-2008. Intuitive findings provide strong evidence for the reliability and robustness of our estimation framework: CU keeps rising during the sample period, while slowing down after 2004; there are substantial differences in CU across industries, regions and ownerships; CU is strongly pro-cyclical; firm investment and government intervention deteriorates the problem of excess capacity.

Keywords: Capacity utilization; Firm heterogeneity; Structural estimation (search for similar items in EconPapers)
JEL-codes: D24 D61 E32 L11 O47 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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