The Life-Cycle Growth of Plants: The Role of Productivity, Demand and “Distortions”

69 Pages Posted: 23 May 2018

See all articles by Marcela Eslava

Marcela Eslava

University of the Andes (CEDE)

John Haltiwanger

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Date Written: May 10, 2018

Abstract

Using rich product level data on prices and quantities at the establishment level for Colombia, complemented with information on input use, we develop a methodological approach to decomposing output and sales growth over an establishment's life cycle. Our approach measures output at the plant-level using plant-level deflators that capture within plant changes in quality/appeal from product turnover. Idiosyncratic variation in measured fundamentals (e.g.,technical efficiency (TFPQ), between plant variation in demand/appeal, and input prices) explain more than 100% of the variability of output and sales relative to birth level, so that implied wedges dampen actual growth relative to that implied by fundamentals. This is consistent with either adjustment frictions or distortions that implicitly tax plants with strong fundamentals. About two thirds of the contribution of fundamentals to output growth is from technical efficiency and one third from idiosyncratic variation in demand/appeal, while for sales this latter component explains over 80% of the contribution of fundamentals. A reduced form decomposition of output and sales growth volatility implies that uncorrelated wedges account for about 20% of output and 10% of sales growth volatility. The (absolute) contribution of both correlated and uncorrelated wedges is substantially greater for young compared to more mature plants. We also show that our inferences about the respective role of fundamentals and wedges are quite different from those drawn from revenue and input data alone. Use of the latter (which is the common approach in the literature) yields a substantial overstatement of the contribution of role of wedges in accounting for sales growth volatlitiy.

Keywords: post-entry growth; TFPQ; demand; distortions

JEL Classification: O47; O14; O39

Suggested Citation

Eslava, Marcela and Haltiwanger, John C., The Life-Cycle Growth of Plants: The Role of Productivity, Demand and “Distortions” (May 10, 2018). Available at SSRN: https://ssrn.com/abstract=3177289 or http://dx.doi.org/10.2139/ssrn.3177289

Marcela Eslava (Contact Author)

University of the Andes (CEDE) ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

John C. Haltiwanger

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3504 (Phone)
301-405-3542 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Institute for the Study of Labor (IZA) ( email )

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

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