In any time period, in any industry, plant productivity levels differ widely and this dispersion is persistent. This paper explores the sources of this dispersion and their relative magnitudes in the textile industry. Plants that are measured as being more productive but pay higher wages are not necessarily more profitable; wage dispersion can account for approximately 15 percent of productivity dispersion. A plant that is highly productive today may not be as productive tomorrow. I develop a new method for measuring ex-ante dispersion and the percentage of dispersion "explained" by mean reversion. Mean reversion accounts for as much as one half the observed productivity dispersion. A portion of the dispersion, however, appears to reflect real quality differences between plants; plants that are measured as being more productive expand faster and are less likely to exit.
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ARE FIXED EFFECTS FIXED? Persistence in Plant Level Productivity
May 1996
Working Paper Number:
CES-96-03
Estimates of production functions suffer from an omitted variable problem; plant quality is an omitted variable that is likely to be correlated with variable inputs. One approach is to capture differences in plant qualities through plant specific intercepts, i.e., to estimate a fixed effects model. For this technique to work, it is necessary that differences in plant quality are more or less fixed; if the "fixed effects" erode over time, such a procedure becomes problematic, especially when working with long panels. In this paper, a standard fixed effects model, extended to allow for serial correlation in the error term, is applied to a 16-year panel of textile plants. This parametric approach strongly accepts the hypothesis of fixed effects. They account for about one-third of the variation in productivity. A simple non-parametric approach, however, concludes that differences in plant qualities erode over time, that is plant qualities f-mix. Monte Carlo results demonstrate that this discrepancy comes from the parametric approach imposing an overly restrictive functional form on the data; if there were fixed effects of the magnitude measured, one would reject the hypothesis of f-mixing. For textiles, at least, the functional form of a fixed effects model appears to generate misleading conclusions. A more flexible functional form is estimated. The "fixed" effects actually have a half life of approximately 10 to 20 years, and they account for about one-half the variation in productivity.
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Whittling Away At Productivity Dispersion Futher Notes: Persistent Dispersion or Measurement Error?
November 1996
Working Paper Number:
CES-96-11
This note considers several hypotheses regarding measurement error as a source of observed cross-sectional dispersion in plant-level productivity in the US textile industry. The hypotheses that reporting error and/or price rigidity in either materials and/or output account for a substantial portion of the observed dispersion in productivity are consistent with the data. Similarly, the hypothesis that transitory product niches or fashion effects lead to differential markups and consequently dispersion in observed productivity is consistent with the data. The hypothesis that transfer pricing problems lead to persistent differences in plant-level productivity, in contrast, does not appear to be consistent with the data. Finally, the hypothesis that some plants have permanent product niches that lead to dispersion in observed productivity does not appear to be consistent with data. In order to avoid imposing a strong functional form on the data, this note follows a non-parametric methodology developed in the early paper.
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Technology Locks, Creative Destruction And Non-Convergence In Productivity Levels
April 1995
Working Paper Number:
CES-95-06
This paper presents a simple solution to a new model that seeks to explain the distribution of plants across productivity levels within an industry, and empirically confirms some key predictions using the U.S. textile industry. In the model, plants are locked into a given productivity level, until they exit or retool. Convex costs of adjustment captures the fact that more productive plants expand faster. Provided there is technical change, productivity levels do not converge; the model achieves persistent dispersion in productivity levels within the context of a distortion free competitive equilibrium. The equilibrium, however, is rather turbulent; plants continually come on line with the cutting edge technology, gradually expand and finally exit or retool when they cease to recover their variable costs. The more productive plants create jobs, while the less productive destroy them. The model establishes a close link between productivity growth and dispersion in productivity levels; more rapid productivity growth leads to more widespread dispersion. This prediction is empirically confirmed. Additionally, the model provides an explanation for S-shaped diffusion.
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Productivity Races I: Are Some Productivuty Measures Better Than Others?
January 1997
Working Paper Number:
CES-97-02
In this study we construct twelve different measures of productivity at the plant level and test which measures of productivity are most closely associated with direct measures of economic performance. We first examine how closely correlated these measures are with various measures of profits. We then evaluate the extent to which each productivity measure is associated with lower rates of plant closure and faster plant growth (growth in employment, output, and capital). All measures of productivity considered are credible in the sense that highly productive plants, regardless of measure, are clearly more profitable, less likely to close, and grow faster. Nevertheless, labor productivity and measures of total factor productivity that are based on regression estimates of production functions are better predictors of plant growth and survival than factor share-based measures of total factor productivity (TFP). Measures of productivity that are based on several years of data appear to outperform measures of productivity that are based solely on data from the most recent year.
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Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry
September 2011
Working Paper Number:
CES-11-25
This paper presents a quantitative model of productivity dispersion to explain why inefficient producers are slowly selected out of the ready-mix concrete industry. Measured productivity dispersion between the 10th and 90th percentile falls from a 4 to 1 difference using OLS, to a 2 to 1 difference using a control function. Due to volatile productivity and high sunk entry costs, a dynamic oligopoly model shows that to rationalize small gaps in exit rates between high and low productivity plants, a plant in the top quintile must produce 1.5 times more than a plant in the bottom quintile.
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Productivity Races II: The Issue of Capital Measurement
January 1997
Working Paper Number:
CES-97-03
This paper explores the role of capital measurement in determining the productivity of individual textile plants. In addition to gross book value of capital, we experiment with a perpetual inventory measure of capital and implicit (estimated) deflator associated with the age of the plant. Following the methodology of the earlier paper (Productivity Races I), we find that measures of productivity constructed from different measures of capital are highly correlated. Further, their association with alternative measures of economic performance is approximately the same. Nevertheless, the perpetual inventory measure of capital -- the most desirable measure from a theoretical perspective -- does consistently outperform the other two measures.
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Materials Prices and Productivity
June 2012
Working Paper Number:
CES-12-11
There is substantial within-industry variation, even within industries that use and produce homogeneous inputs and outputs, in the prices that plants pay for their material inputs. I explore, using plant-level data from the U.S. Census Bureau, the consequences and sources of this variation in materials prices. For a sample of industries with relatively homogeneous products, the standard deviation of plant-level productivities would be 7% lower if all plants faced the same materials prices. Moreover, plant-level materials prices are both persistent across time and predictive of exit. The contribution of net entry to aggregate productivity growth is smaller for productivity measures that strip out di'erences in materials prices. After documenting these patterns, I discuss three potential sources of materials price variation: geography, di'erences in suppliers. marginal costs, and suppliers. price discriminatory behavior. Together, these variables account for 13% of the dispersion of materials prices. Finally, I demonstrate that plants.marginal costs are correlated with the marginal costs of their intermediate input suppliers.
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Price Dispersion in U.S. Manufacturing
October 1989
Working Paper Number:
CES-89-07
This paper addresses the question of whether products in the U.S. Manufacturing sector sell at a single (common) price, or whether prices vary across producers. The question of price dispersion is important for two reasons. First, if prices vary across producers, the standard method of using industry price deflators leads to errors in measuring real output at the firm or establishment level. These errors in turn lead to biased estimates of the production function and productivity growth equation as shown in Abbott (1988). Second, if prices vary across producers, it suggests that producers do not take prices as given but use price as a competitive variable. This has several implications for how economists model competitive behavior.
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Punctuated Entrepreneurship (Among Women)
May 2018
Working Paper Number:
CES-18-26
The gender gap in entrepreneurship may be explained in part by employee non-compete agreements. Exploiting exogenous state-level variation in non-compete policy, I find that women more strictly subject to non-competes are 11-17% more likely to start companies after their employers dissolve. This result is not explained by the incidence of non-competes or lawsuits; however, women face higher relative costs in defending against potential litigation and in returning to paid employment after abandoning their ventures. Thus entrepreneurship among women may be 'punctuated' in that would-be female founders are throttled by non-competes, their potential unleashed only by the failure of their employers.
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Market Structure and Productivity: A Concrete Example
June 2001
Working Paper Number:
CES-01-06
This paper shows that imperfect output substitutability explains part of the observed persistent plant-level productivity dispersion. Specifically, as substitutability in a market increases, the market's productivity distribution exhibits falling dispersion and higher central tendency. The proposed mechanism behind this result is truncation of the distribution from below as increased substitutability shifts demand to lower-cost plants and drives inefficient plants out of business. In a case study of the ready-mixed concrete industry, I examine the impact of one manifestation of this effect, driven by geographic market segmentation resulting from transport costs. A theoretical foundation is presented characterizing how differences in the density of local demand impact the number of producers and the ability of customers to choose between suppliers, and through this, the equilibrium productivity and output levels across regions. I also introduce a new method of obtaining plant-level productivity estimates that is well suited to this application and avoids potential shortfalls of commonly used procedures. I use these estimates to empirically test the presented theory, and the results support the predictions of the model. Local demand density has a significant influence on the shape of plant-level productivity distributions, and accounts for part of the observed intra-industry variation in productivity, both between and within given market areas.
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