Levinsohn and Petrin's (2003) Methodology Works under Monopolistic Competition

Sergio DeSouza ()
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Sergio DeSouza: Universidade Federal do Ceara

Economics Bulletin, 2006, vol. 12, issue 6, 1-11

Abstract: Markups, returns to scale and productivity can be uncovered from regressing output on inputs. However, econometric identification of theses parameters may be problematic due the simultaneity problem. A common solution is the IV method. However, usual instruments are only weakly correlated to the explanatory variables. Levinsohn and Petrin (2003) propose using a commonly observable variable (intermediate input) to control for unobserved productivity. Their methodology is based on the following key result: under the assumption of perfect competition, the intermediate input's demand function is a monotonic function of productivity. However, firms in most industries enjoy some degree of market power such that perfect competition may not be a desirable assumption for most empirical studies. This paper contributes to the literature by showing the monotonicity condition holds under monopolistic competition.

Keywords: Imperfect; Competition (search for similar items in EconPapers)
JEL-codes: D2 L1 (search for similar items in EconPapers)
Date: 2006-08-09
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Citations: View citations in EconPapers (1)

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