Measured Productivity with Endogenous Markups and Economic Profits

Anthony Savagar

No 819, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: I show that sluggish variation in firm entry over the business cycle can account for significant variation in measured TFP through profit and markup channels. I develop a model of dynamic firm entry, oligopolistic competition and returns to scale in order to decompose TFP fluctuations into technical change, economic profit and markup fluctuations. I show that economic profits cause short-run upward bias in measured TFP, but this subsides to upward bias from endogenous markups as firm entry adjusts. I analyze dynamics analytically through a nonparametric DGE model that allows for a perfect com-petition equilibrium such that there are no biases in measured TFP. Given market power, simulations show that measured TFP is 40%higher than technology in the short-run, due solely to profits, and 20% higher in the long-run due solely to markups. The speed of firm adjustment (‘business dynamism’) will determine importance of each bias.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-eff
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Related works:
Journal Article: Measured productivity with endogenous markups and economic profits (2021)
Working Paper: Measured Productivity with Endogenous Markups and Economic Profits (2021)
Working Paper: Measured Productivity with Endogenous Markups and Economic Profits (2018)
Working Paper: Firm Dynamics, Dynamic Reallocation, Variable Markups, and Productivity Behaviour (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:819

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