Firm-Level Dispersion in Productivity: Is the Devil in the Details?

Lucia Foster, Cheryl Grim, John Haltiwanger, and Zoltan Wolf , American Economic Review Papers & Proceedings 106(5) , 95-98 , May 2016.

We explore current interpretations of firm-level dispersion in revenue-based productivity measures. Since revenue function estimates using proxy methods differ from factor elasticities, the residual emerging from this method remains a combination of demand and technical effciency shocks, and is not equal to the concept of revenue productivity that plays an important role in recent literature on misallocation. This has implications for applications where measured revenue productivity dispersion is used as an indicator of misallocation. Our empirical evidence suggests, under iso-elastic demand, measured dispersion may indicate either distortions or variation in demand shocks and technical effciency or all of the above.

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