Measuring Markups with Production Data

Abstract

We show standard methods to estimate production functions do not identify markups.
This nonidentification creates spurious skewness in estimated markup distributions.
We also show that ex-ante structure on the returns to scale solves the identification
problem. In US public firm data and in a Monte Carlo experiment, we find that
applying constant returns to scale performs remarkably well and reduces the skewness
in the markup distribution among public-firm by as much as half in comparison to
nonidentified estimates. This results in half the efficiency losses in output and labor
shares when calibrated to a recent macroeconomic model.

Keywords: Market Power, Markups, Production Functions, Productivity, Labor Share

JEL Classification: E2, L11, L13, D24