Productivity, Welfare and Reallocation : Theory and Firm-Level Evidence
A considerable literature has focused on the determinants of total factor productivity (TFP), prompted by the empirical finding that TFP accounts for the bulk of long-term growth. This paper offers a deeper reason for such focus: the welfare of a r...
| Main Authors: | , , , |
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| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100302082024 http://hdl.handle.net/10986/3713 |
| Summary: | A considerable literature has focused on
the determinants of total factor productivity (TFP),
prompted by the empirical finding that TFP accounts for the
bulk of long-term growth. This paper offers a deeper reason
for such focus: the welfare of a representative consumer is
summarized by current and anticipated future Solow
productivity residuals. The equivalence holds for any
specification of technology and market structure, as long as
the representative household maximizes utility while taking
prices parametrically. This result justifies total factor
productivity as the right summary measure of welfare, even
in situations where it does not properly measure technology,
and makes it possible to calculate the contributions of
disaggregated units (industries or firms) to aggregate
welfare using readily available data. Based on this finding,
the authors compute firm and industry contributions to
welfare for a set of European countries (Belgium, France,
Great Britain, Italy, Spain) using industry-level and
firm-level data. With additional assumptions about
technology and market structure (specifically, that firms
minimize costs and face common factor prices), the authors
show that welfare change can be further decomposed into
three components that reflect, respectively, technical
change, aggregate distortions, and allocative efficiency.
Then, using the appropriate firm-level data, they assess the
importance of each of these components as sources of welfare
improvement in the same set of European countries. |
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