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

48 Pages Posted: 2 Mar 2010

See all articles by Susanto Basu

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 - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: December 2, 2009

Abstract

We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies total factor productivity (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. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, and 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 changes in welfare can be decomposed into three components that reflect, respectively, technological change, aggregate distortions, and allocative efficiency. Then, using 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.

JEL Classification: D24, D9, E2, O47

Suggested Citation

Basu, Susanto and Pascali, Luigi and Schiantarelli, Fabio and Servén, Luis, Productivity, Welfare, and Reallocation: Theory and Firm-Level Evidence (December 2, 2009). FRB of Boston Working Paper No. 09-19, Available at SSRN: https://ssrn.com/abstract=1559380 or http://dx.doi.org/10.2139/ssrn.1559380

Susanto Basu (Contact Author)

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

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National Bureau of Economic Research (NBER) ( email )

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Luigi Pascali

Boston College ( email )

140 Commonwealth Avenue
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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 - Development Research Group (DECRG)

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

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