Quality Adjustment in Industry Deflators Strengthens Estimated Innovation-Productivity Relationships

Enghin Atalay, Ali Hortaçsu, Nicole Kimmel and Chad Syverson

AEA Papers and Proceedings, 2026, vol. 116, 446-451

Abstract: This article studies how industry innovation translates into subsequent productivity growth. It reviews a method that uses gaps between consumer- and producer-facing price indices to estimate mismeasurement in industry TFP growth. Measured productivity growth is understated in manufacturing, especially in durable goods, with the largest mismeasurement in Computer and Electronic Product Manufacturing. Correcting for this mismeasurement roughly doubles the estimated slope of the relationship between innovation proxies—R&D intensity and patents per employee—and subsequent TFP growth. These findings reflect rapid changes in product characteristics in innovative industries that standard industry deflators do not fully capture.

JEL-codes: D22 D24 E23 E31 L60 O31 O34 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/pandp.20261042

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