2019/26 | LEM Working Paper Series | ||||||||||||||||
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Aggregate Productivity Growth in the Presence of (Persistently) Heterogeneous Firms |
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Giovanni Dosi, Marco Grazzi, Le Li, Luigi Marengo and Simona Settepanella |
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Keywords | |||||||||||||||||
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Productivity measurement; Decomposition of aggregate productivity
growth; Firm heterogeneity.
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JEL Classifications | |||||||||||||||||
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D24, C67, C81, O30
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Abstract | |||||||||||||||||
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In this article we propose a new methodology for computing the aggregate
productivity of an industry, its variations and decompositions of the latter into
changes of individual productivities (within effect) and changes in industry
composition (between effect). Current aggregate measures rely on some weighted average
of individual productivities, and decompositions distinguish between the effect of
productivities and weights on variations of the average. However such aggregate
measure is incoherent with the disaggregate one (the two are computed with
different methodologies), is subject to aggregation biases, arbitrariness in the choice
of weights, and information loss. Such problems are particularly serious when
heterogeneity among firms is high. We propose instead a geometric approach where
aggregate productivity can be measured directly on industry data, but nevertheless
its variations can be decomposed into between and within effects plus an heterogeneity
effect. We show that our measure does not incur in many of the problems
of the weighted average and we also present an empirical application to European
data.
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