Why is Productivity Correlated with Competition?

Matthew Backus

No 25748, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The correlation between productivity and competition is an oft–observed but ill–understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I find no evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semi-parametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.

JEL-codes: L22 L23 L25 L61 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-com, nep-eff and nep-ind
Note: IO PR
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Citations: View citations in EconPapers (6)

Published as Matthew Backus, 2020. "Why Is Productivity Correlated With Competition?," Econometrica, Econometric Society, vol. 88(6), pages 2415-2444, November.

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Working Paper: Why is Productivity Correlated with Competition? (2014)
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