Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence

49 Pages Posted: 15 Dec 2009  

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Luigi Pascali

Boston College

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Luis Servén

World Bank - Office of the Chief Economist; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: December 2009

Abstract

We prove that in a closed economy without distortionary taxation, the welfare of a representative consumer is summarized to a first order by the current and expected future values of the Solow productivity residual in level and by the initial endowment of capital. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. We show how these results must be modified if the economy is open or if taxes are distortionary. We then compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that re.ect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.

Suggested Citation

Basu, Susanto and Pascali, Luigi and Schiantarelli, Fabio and Servén, Luis, Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence (December 2009). NBER Working Paper No. w15579. Available at SSRN: https://ssrn.com/abstract=1522368

Susanto Basu (Contact Author)

Boston College, College of Arts and Sciences, Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3806
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617-552-2308 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Luigi Pascali

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Fabio Schiantarelli

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-4512 (Phone)
617-552-2308 (Fax)

HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Luis Servén

World Bank - Office of the Chief Economist ( email )

Washington, DC 20433
United States
202-473-7451 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/research/bios/lserven.htm

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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