Unraveling Firms: Demand, Productivity and Markups Heterogeneity

74 Pages Posted: 27 Jan 2016 Last revised: 11 Dec 2017

See all articles by Emanuele Forlani

Emanuele Forlani

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Ralf Martin

Imperial College London

Giordiano Mion

University of Sussex

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment; London School of Economics - Centre for Economic Performance

Date Written: January 2016

Abstract

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.

Keywords: China, Demand, Import competition, Import Status, Markups, Production function estimation, Productivity

JEL Classification: D24, F14, L11, L25

Suggested Citation

Forlani, Emanuele and Martin, Ralf and Mion, Giordiano and Muûls, Mirabelle, Unraveling Firms: Demand, Productivity and Markups Heterogeneity (January 2016). CEPR Discussion Paper No. DP11058, Available at SSRN: https://ssrn.com/abstract=2723319

Emanuele Forlani (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Ralf Martin

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Giordiano Mion

University of Sussex ( email )

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

London School of Economics - Centre for Economic Performance ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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