Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 07-2: Do Input Quality and Structural Productivity Estimates Drive Measured Differences in Firm Productivity?

Jeremy T. Fox () and Valérie Smeets ()
Additional contact information
Jeremy T. Fox: University of Chicago, Postal: University of Chicago
Valérie Smeets: Department of Economics, Aarhus School of Business, Postal: Universidad Carlos III & CCP, The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: Firms in the same industry can differ in measured total factor productivity (TFP) by multiples of 3. Griliches (1957) suggests one explanation: the quality of inputs differs across firms. Labor inputs are traditionally measured only as the number of workers. We investigate whether adjusting for the quality of labor inputs substantially decreases measured TFP dispersion. We add labor market history variables such as experience and firm and industry tenure, as well as general human capital measures such as schooling and sex. We also investigate whether an innovative structural estimator for productivity due to Olley and Pakes (1996) substantially decreases measured residual TFP. Combining labor quality and structural estimates of productivity, the one standard deviation difference in residual TFPs in manufacturing drops from 0.70 to 0.67 multiples. Neither the structural productivity measure nor detailed input quality measures explain the very large measured residual TFP dispersion, despite statistically precise coefficient estimates

Keywords: production function estimation; total factor productivity; input quality; structural estimates of productivity

JEL-codes: D24; L23; M11

40 pages, February 1, 2007

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