Allocation and industry productivity: Accounting for firm turnover

Mika Maliranta and Niku Määttänen

No 11, ETLA Working Papers from The Research Institute of the Finnish Economy

Abstract: Recent macroeconomic literature has stressed the importance of resource allocation between firms for aggregate productivity. An important issue, therefore, is how to measure allocative efficiency. We compare popular indicators of allocative efficiency, paying special attention to firm turnover. We first show how entering and exiting firms contribute to aggregate productivity and to the Olley-Pakes (OP) covariance component, which is currently the most popular measure of allocative efficiency. Our data cover essentially all firms and plants in the Finnish business sector. We then build a model of firm dynamics with endogenous turnover that is consistent with the main patterns of our empirical results and use it to test how well alternative indicators capture different allocation distortions. Our results demonstrate how and why commonly used indicators fail to capture certain distortions because of endogenous changes in firm turnover.

Keywords: productivity; firm dynamics; reallocation (search for similar items in EconPapers)
JEL-codes: E23 L16 O47 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2013-05-27
New Economics Papers: this item is included in nep-bec, nep-eff and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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