Unraveling firms: demand, productivity and markups heterogeneity

Emanuele Forlani (emanuele.forlani@unipv.it), Ralf Martin, Giordano Mion and Mirabelle Muûls (m.muuls@imperial.ac.uk)

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We develop a novel framework that simultaneously allows recovering heterogeneity in demand, quantity TFP and markups across firms while leaving the correlation between the three dimensions unrestricted. We accomplish this by explicitly introducing demand heterogeneity and 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 firm's 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. In doing so, we find quantity TFP and demand to be strongly negatively correlated with each other so suggesting a trade-off between the quality of a firm's products and their production cost. We also show how our framework provides deeper and sharper insights on the response of firms to increasing import competition from China. In particular, we find that changes in revenue productivity materialise as the outcome of complex, and sometimes offsetting, changes in quantity TFP, demand, markups and production scale.

Keywords: Demand; productivity; markups; production function estimation; import competition; China (search for similar items in EconPapers)
JEL-codes: D24 F14 L11 L25 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2016-01-19
New Economics Papers: this item is included in nep-bec and nep-eff
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Citations: View citations in EconPapers (20)

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Related works:
Journal Article: Unraveling Firms: Demand, Productivity and Markups Heterogeneity (2023)
Working Paper: Unraveling firms: demand, productivity and markups heterogeneity (2016)
Working Paper: Unraveling Firms: Demand, Productivity and Markups Heterogeneity (2016)
Working Paper: Unraveling Firms: Demand, Productivity and Markups Heterogeneity (2016)
Working Paper: Unraveling firms: Demand, productivity and markups heterogeneity (2016)
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