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Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?

Lucia Foster (), John Haltiwanger and Chad Syverson

No 1705, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high "productivity" businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth.

Keywords: market selection; productivity dynamics; reallocation (search for similar items in EconPapers)
JEL-codes: L10 J63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff and nep-ent
Date: 2005-08
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Published in: American Economic Review, 2008, 98 (1), 394-425

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Journal Article: Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? (2008) Downloads
Working Paper: Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? (2005) Downloads
Working Paper: Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? (2005) Downloads
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