Productivity and Quality of Multi-product Firms

Mauro Caselli, Arpita Chatterjee (chatterjee.econ@gmail.com) and Shengyu Li (shengyu.li@unsw.edu.au)
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Arpita Chatterjee: UNSW School of Economics
Shengyu Li: UNSW School of Economics

No 2023-10, Discussion Papers from School of Economics, The University of New South Wales

Abstract: This paper proposes a novel method to estimate productivity and quality at the firm-product level, together with transformation function and demand parameters. The method relies on firm optimization conditions to obtain a one-to-one mapping between observed data and unobserved productivity and quality. It has the advantage of allowing for heterogeneous unobserved intermediate input prices and scalability to handle a large number of products, without imputing firm-product input shares or relying on productivity evolution. We apply this method to a set of Mexican manufacturing industries. We find that multi-product firms’ better performing products have both higher productivity and higher quality, with the former emerging as a stronger predictor of within-firm performance. However, firms face a trade-off between quality and productivity, which we refer to as the cost of quality. The cost of quality is higher for more differentiated products and declines with product age. In a counterfactual exercise, we show that a reduction in the cost of quality can lead to substantial firm-level productivity gains and that, on average, about 26.5 percent of these gains are due to the within-firm reallocation of production. Importantly, a larger product scope allows more room for intra-firm resource reallocation, leading to higher productivity gains. This reveals a new mechanism for enhancing the performance of multi-product firms.

Keywords: multi-product firms; production function; productivity; output quality; intra- firm reallocation (search for similar items in EconPapers)
JEL-codes: D24 L11 L15 O47 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2023-06
New Economics Papers: this item is included in nep-bec, nep-eff and nep-ind
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