Measuring Markups with Production Data
41 Pages Posted: 3 Apr 2019 Last revised: 16 Jun 2019
Date Written: June 13, 2019
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
Suggested Citation: Suggested Citation