Products and Productivity
Andrew B. Bernard
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Stephen J. Redding
Peter K. Schott
Yale University - School of Management; National Bureau of Economic Research (NBER)
NBER Working Paper No. w11575
Firms' decisions about which goods to produce are often made at a more disaggregate level than the data observed by empirical researchers. When products differ according to production technique or the way in which they enter demand, this data aggregation problem introduces a bias into standard measures of firm productivity. We develop a theoretical model of heterogeneous firms endogenously self-selecting into heterogeneous products. We characterize the bias introduced by unobserved variation in product mix across firms, and the implications of this bias for identifying firm and industry responses to exogenous policy shocks such as deregulation. More generally, we demonstrate that product switching gives rise to a richer set of industry-level dynamics than models where firm product mix remains fixed.
Number of Pages in PDF File: 45
Date posted: October 17, 2005
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