In Search of True Productivity Differences

Abstract

Recent work on production functions estimation revealed that substantial biases can be introduced into the estimates when the assumption of perfect competition and price exogeneity is not satis.ed in the data itself. As Klette and Griliches (1996) show applying traditional econometrics in diferentiated food markets will negatively bias the scale estimates of the production function. In fact, when de.ated sales are used as a proxy for output in case of diferentiated good industries scale economies (and subsequently productivity) cannot be estimated independently of markups. We extend this basic framework to show that, if exporting markups are smaller than those attainable in the domestic market, the Klette-Griliches estimation procedure will tend to overestimate exporting markups and underestimate their productivity. In addition, we provide an estimation algorithm based on the Olley-Pakes (1996) framework that could serve to ensure unbiased estimates of ex-porter productivity.

Keywords: Productivity measurement, Imperfect competition, Exporting, Foreign direct investment

JEL Classification: C14, D24, L11, L25