Why is Productivity Correlated with Competition?

57 Pages Posted: 15 Apr 2019

See all articles by Matthew Backus

Matthew Backus

Cornell University - Department of Economics

Date Written: April 2019

Abstract

The correlation between productivity and competition is an oft–observed but ill–understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I find no evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semi-parametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.

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Suggested Citation

Backus, Matthew, Why is Productivity Correlated with Competition? (April 2019). NBER Working Paper No. w25748. Available at SSRN: https://ssrn.com/abstract=3372052

Matthew Backus (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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