Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs

We propose a new measure of allocative efficiency based on unrealized increases in aggregate productivity growth. We show that the difference in the value of the marginal product of an input and its marginal cost at any plant - the plant-input "gap" - is exactly equal to the change in aggregate output that would occur if that plant changed that input's use by one unit. The mean absolute gap across plants for any input can then be interpreted as an approximation to the gain to society that would occur if every plant had a one-unit change in that input in the efficient direction, holding everything else constant. We show how to estimate this average gap using plant-level data for 1982-1994 from Chilean manufacturing, a sector largely viewed as being one of South America's least distorted. We find the gaps for blue and white collar labor are quite large in absolute value and imply that a one-unit move in the correct direction for blue collar would increase aggregate value added by almost 0.5%. We also find that the gaps for blue and white collar workers are increasing over time while the gaps for materials and electricity are not. The timing of the two separate increases in firing costs and the sharpest increases in the labor gaps is suggestive that the increases in average within-firm labor gaps may be related to the increases in severance pay.

Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile

The extensive empirical macro- and micro-level evidence on the impact of job security provisions is largely inconclusive. We argue that the weak evidence is a consequence of the weak power of statistics used, which is suggested by a dynamic theory of plant-level labor demand that we develop. This model speaks clearly on one issue: firing costs drive a wedge between the marginal revenue product of labor and its marginal cost. We examine changes in this gap as our test statistic. It is easy to compute and has a welfare interpretation. We use census data of Chilean manufacturing firms for the years 1979-1996 to look for real effects induced by two significant increases in the costs of dismissing employees. Similar to previous findings in other data, the traditional labor demand statistics provide little evidence of a negative impact from increases in firing costs. While we find no evidence that gaps increase for inputs that are not directly affected by firing costs, we find large and statistically significant increases in the mean and variance of the within-firm gap between the marginal revenue product of labor and the wage for both blue and white collar workers.

Omitted Product Attributes in Discrete Choice Models

We describe two methods for correcting an omitted variables problem in discrete choice models: a fixed effects approach and a control function approach. The control function approach is easier to implement and applicable in situations for which the fixed effects approach is not. We apply both methods to a cross-section of disaggregate data on customer's choice among television options including cable, satellite, and antenna. As theory predicts, the estimated price response rises substantially when either correction is applied. All of the estimated parameters and the implied price elasticities are very similar for both methods.

Measuring Aggregate Productivity Growth Using Plant-Level Data

We define productivity growth as the change in welfare that arises from additional output holding primary inputs constant. Using this traditional growth-accounting definition, we show that gains may arise because of plant-level technology shocks, and, in imperfectly competitive settings, from the reallocation of inputs across plants with differing markups and/or shadow values of primary inputs. With plant-level data, the alternative and most popular definition of productivity growth looks at the difference in the first moments of the productivity distribution. We show that this definition adds an additional term to the growth-accounting measure, which has been called “reallocation.” We show there is a very weak relationship between the two indexes in almost every 3-digit manufacturing industry in both Chile from 1987-1996 and Colombia from 1981-1991 - 49 in total - primarily because this “reallocation” term is large and volatile. We explore the theoretical reasons for this sharp divergence, in the process uncovering a number of previously unnoticed and unattractive features of the first-moment definition. For example, it is not tethered to any theoretical model, it is sensitive to measured units, and it can report positive productivity growth when welfare has fallen.

Measuring Aggregate Productivity Growth Using Plant-Level Data

We define aggregate productivity growth as the change in aggregate final demand minus the change in the aggregate cost of primary inputs. We show how to aggregate plant-level data to this measure and how to use plant-level data to decompose our measure into technical efficiency and reallocation components. This requires us to confront the "non-neoclassical" features that impact plant-level data including plant-level heterogeneity, the entry and exit of goods, adjustment costs, fixed and sunk costs, and market power. We compare our measure of aggregate productivity growth to several competing variants that are based only on a single plant-level factor of technical efficiency. We show that theory suggests our measure may differ substantially from these measures of aggregate productivity growth. We illustrate this using panel data from manufacturing industries in Chile. We find that our measure does differ substantially from other widely used measures with especially marked differences in the fraction of productivity growth attributed to reallocation.

Estimating Production Functions Using Inputs to Control for Unobservables

We introduce a new method for conditioning out serially correlated unobserved shocks to the production technology by building ideas first developed in Olley and Pakes (1996). Olley and Pakes show how to use investment to control for correlation between input levels and the unobserved firm-specific productivity process. We prove that like investment, intermediate inputs (those inputs which are typically subtracted out in a value-added production function) can also solve this simultaneity problem. We highlight three potential advantages to using an intermediate inputs approach relative to investment. Our results indicate that these advantages are empirically important.

Estimating Explaining Reallocation's Apparent Negative Contribution to Growth

We explain a puzzle from two recent meta-analyses that cover 25 countries and claim to show that inputs systematically move from higher-value to lower-value activities despite strong aggregate labor productivity growth (ALP). These papers use variants of the Baily, Hulten and Campbell (1992) decomposition of ALP to show that the reallocation covariance term is negative in all but two countries and the reallocation between term is negative in nine countries and weakly positive in most others. We decompose ALP using three micro-level data sets from Chile, Colombia, and Slovenia and show the same puzzle holds. We show that the ALP between term can be decomposed into a term related to reallocation and a term related to the change in the total number of .ms, the latter of which often works to reduce the total between term in our data. We also show these ALP patterns can arise because of heterogeneity in labor and capital, unobserved output prices, or capacity utilization, but controlling for them only marginally helps to explain away the ALP reallocation puzzles in our micro-level data sets. We show that there is no puzzle when one decomposes aggregate productivity growth in the terms of National Accounts, as inputs in the aggregate move from low to high value activities in 36 of our 39 country-year observations. We conclude that there is a fundamental difference in re- allocation measured by the ALP decomposition and that measured by the decomposition of National Accounts growth.

The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable Television

This paper examines the introduction of Direct Broadcast Satellites as an alternative to cable television and the welfare gains such satellites generated for consumers. The extent to which satellites compete with cable has become an important issue in the debate over re-regulation of cable prices. We estimate a consumer level demand system for satellite, basic cable, premium cable and local antenna using extensive micro data on the television choices of more than 15,000 people as well as price and characteristics data on cable companies throughout the nation. The results indicate that, after properly controlling for unobservable product attributes and the endogeneity of prices, the direct welfare gain to satellite buyers averages about $50 dollars per year or approximately$450 million annually in the aggregate. Estimates that do not control for unobserved attributes and endogenous prices overstate the welfare gains by almost a factor of fifteen. The price sensitivity of satellite to both its own price and the price of cable is extremely high. The price sensitivity of cable, however, is low, likely indicating that satellite is not a close substitute at the time of our sample.