DP11058 Unraveling Firms: Demand, Productivity and Markups Heterogeneity

Author(s): Emanuele Forlani, Ralf Martin, Giordano Mion, Mirabelle Muûls
Publication Date: January 2016
Date Revised: December 2017
Keyword(s): China, Demand, Import competition, Import Status, Markups, Production function estimation, Productivity
JEL(s): D24, F14, L11, L25
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11058

We develop a novel econometric framework that simultaneously allows recovering heterogeneity in demand, quantity TFP and markups across firms while leaving the correlation among the three unrestricted. We accomplish this by explicitly introducing demand heterogeneity and by systematically exploiting assumptions used in previous productivity estimation approaches. In doing so, we provide an exact decomposition of revenue productivity in terms of the underlying heterogeneities thus bridging the gap between quantity and revenue productivity estimations. We use Belgian firms production data to quantify TFP, demand and markups and show how they are correlated with each other, across time and with measures obtained from other approaches. We also show how and to what extent our three dimensions of heterogeneity provide deeper and sharper insights on two questions: firm response to increasing import competition from China and the productivity advantage of importers.