Productivity Spreads, Market Power Spreads and Trade

Ralf Martin

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Much of recent Trade theory focuses on heterogeneity of firms and the differential impact trade policy might have on firms with different levels of productivity. A common problem is that most firm level dataset do not contain information on output prices of firms which makes it difficult to distinguish between productivity differences and differences in market power between firms. This paper develops a new econometric framework that allows estimating both firm specific productivity and market power in a semi-parametric way based on a control function approach. The framework is applied to Chilean firm level data from the early 1980, shortly after the country underwent wide ranging trade reforms. The finding is that in all sectors of the economy market power declined and productivity increased. In sectors with higher import penetration productivity particularly at the bottom end of the distribution increased faster. At the same time market power declined particularly so at the top end of the market power distribution. We also show, that ignoring the effect on market power leads to an underestimation of the positive effects of increased import penetration on productivity.

Keywords: Trade policy; productivity measurement; imperfect competition; productivity dispersion; productivity spread (search for similar items in EconPapers)
JEL-codes: C81 D24 L11 L25 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-eff and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Productivity spreads, market power spreads and trade (2010)
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