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Is heterogeneous capital depreciation important for estimating firm-level productivity? Evidence from Chinese manufacturing firms

Dong Cheng, Jian Yu, Dayong Zhang and Wenping Zheng

Research in International Business and Finance, 2020, vol. 52, issue C

Abstract: This paper contributes to the existing literature on estimating firm-level production functions. Using Chinese manufacturing survey data, we employ the firm-level heterogeneous capital depreciation rate to measure firms’ investment and assess its role using Olley and Pakes (1996) (OP) production function estimation technique. Although there is some ongoing debate on the econometric soundness of the OP technique, we argue quantitatively that the heterogeneous depreciation rate muffles the measurement error associated with the key input demand investment. In our sample, it significantly narrows the gap of total factor productivity (TFP) estimates between the OP technique and a state-of-the-art estimation method that works without investment. We further reveal that the improved performance primarily originates from the dynamic evolution in the distribution of the capital depreciation rate.

Keywords: Production function; Productivity; Capital depreciation; Olley–Pakes; Measurement error (search for similar items in EconPapers)
JEL-codes: C51 D22 D24 M41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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DOI: 10.1016/j.ribaf.2019.101146

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