Estimating entrants' productivity when prices are unobservedEconomic Modelling, 2014, vol. 38, issue C, 640-647 Abstract: Entrant firms are constrained to set lower price–cost markups than incumbents due to idiosyncratic demand shocks faced in the startup phase. Productivity indices suffer from micro-level markup variation and underestimate entrants' productivity, when productivity is measured by nominal sales and expenditures but not quantities. This study makes the first attempt to estimate entrants' productivity by controlling for their markup difference, when prices or quantities are unobserved at the firm-level. The econometric methodology introduces demand side into a structural model of production to account for the price variation. The estimation routine deals with the endogeneity due to unobserved productivity using a control function approach, and retrieves average markups for entrants and incumbents together with a markup-adjusted productivity index. My findings show that entrants set on average lower markups than incumbents in Japanese manufacturing. When productivity is adjusted to markups, entrants are as productive as incumbents, while the standard measures of labor and total factor productivity indicate low productivity for entrant firms. Keywords: Productivity; Price–cost markups; Production function estimation; Control function; Firm entry (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:38:y:2014:i:c:p:640-647 DOI: 10.1016/j.econmod.2013.09.027 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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