Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence

Susanto Basu, Luigi Pascali, Fabio Schiantarelli and Luis Servén

No 4612, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reflect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.

Keywords: productivity; welfare; reallocation; technology; TFP (search for similar items in EconPapers)
JEL-codes: D24 D90 E20 O47 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2009-12
New Economics Papers: this item is included in nep-bec and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Productivity, Welfare and Reallocation: Theory and Firm Level Evidence (2010)
Working Paper: Productivity, welfare and reallocation: theory and firm-level evidence (2010)
Working Paper: Productivity, welfare, and reallocation: theory and firm-level evidence (2009)
Working Paper: Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence (2009)
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