IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-06l10006.html
   My bibliography  Save this article

Levinsohn and Petrin's (2003) Methodology Works under Monopolistic Competition

Author

Listed:
  • Sergio DeSouza

    (Universidade Federal do Ceara)

Abstract

Markups, returns to scale and productivity can be uncovered from regressing output on inputs. However, econometric identification of theses parameters may be problematic due the simultaneity problem. A common solution is the IV method. However, usual instruments are only weakly correlated to the explanatory variables. Levinsohn and Petrin (2003) propose using a commonly observable variable (intermediate input) to control for unobserved productivity. Their methodology is based on the following key result: under the assumption of perfect competition, the intermediate input's demand function is a monotonic function of productivity. However, firms in most industries enjoy some degree of market power such that perfect competition may not be a desirable assumption for most empirical studies. This paper contributes to the literature by showing the monotonicity condition holds under monopolistic competition.

Suggested Citation

  • Sergio DeSouza, 2006. "Levinsohn and Petrin's (2003) Methodology Works under Monopolistic Competition," Economics Bulletin, AccessEcon, vol. 12(6), pages 1-11.
  • Handle: RePEc:ebl:ecbull:eb-06l10006
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/pubs/EB/2006/Volume12/EB-06L10006A.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tor Jakob Klette, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-476, December.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    3. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
    4. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
    5. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-361, July-Aug..
    6. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    7. repec:bla:jindec:v:47:y:1999:i:4:p:451-76 is not listed on IDEAS
    8. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
    9. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
    10. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tsou, Meng-Wen & Yang, Chih-Hai, 2019. "Does gender structure affect firm productivity? Evidence from China," China Economic Review, Elsevier, vol. 55(C), pages 19-36.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ebl:ecbull:v:12:y:2006:i:6:p:1-11 is not listed on IDEAS
    2. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-2471, October.
    3. Frederic Warzynski & Jan De Loecker, 2010. "Markups and Firm-level Exports," 2010 Meeting Papers 438, Society for Economic Dynamics.
    4. Marc-Andreas Muendler, 2004. "Estimating Production Functions When Productivity Change is Endogenous," CESifo Working Paper Series 1143, CESifo.
    5. Sergio Aquino de Souza, 2005. "Estimating Markups From Plant-Level Data," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 098, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. Flora Bellone & Patrick Musso & Lionel Nesta & Frederic Warzynski, 2016. "International trade and firm-level markups when location and quality matter," Journal of Economic Geography, Oxford University Press, vol. 16(1), pages 67-91.
    7. Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2016. "Prices, Markups, and Trade Reform," Econometrica, Econometric Society, vol. 84, pages 445-510, March.
    8. Filip Abraham & Yannick Bormans & Jozef Konings & Werner Roeger, 2020. "Price-cost margins and fixed costs," Working Papers 202010, University of Liverpool, Department of Economics.
    9. De Loecker, Jan, 2011. "Recovering markups from production data," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 350-355, May.
    10. Yuriy Gorodnichenko, 2007. "Using Firm Optimization to Evaluate and Estimate Returns to Scale," NBER Working Papers 13666, National Bureau of Economic Research, Inc.
    11. Ralf Martin, 2005. "Productivity Dispersion, Competition and Productivity Measurement," CEP Discussion Papers dp0692, Centre for Economic Performance, LSE.
    12. Markus Eberhardt & Christian Helmers, 2010. "Untested Assumptions and Data Slicing: A Critical Review of Firm-Level Production Function Estimators," Economics Series Working Papers 513, University of Oxford, Department of Economics.
    13. Alessandro Borin & Michele Mancini, 2016. "Foreign direct investment and firm performance: an empirical analysis of Italian firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(4), pages 705-732, November.
    14. Pulapre Balakrishnan & M. Parameswaran & K. Pushpangadan & M. Suresh Babu, 2006. "Liberalization, Market Power, and Productivity Growth in Indian Industry," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 9(1), pages 55-73.
    15. Doraszelski, Ulrich & Jaumandreu, Jordi, 2006. "R&D and productivity: Estimating production functions when productivity is endogenous," MPRA Paper 1246, University Library of Munich, Germany.
    16. Ornaghi, Carmine, 2006. "Spillovers in product and process innovation: Evidence from manufacturing firms," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 349-380, March.
    17. Haskel, Jonathan & Hawkes, Denise & Pereira, Sonia, 2005. "Skills, human capital and the plant productivity gap: UK evidence from matched plant, worker and workforce data," CEPR Discussion Papers 5334, C.E.P.R. Discussion Papers.
    18. Dobbelaere, Sabien & Kiyota, Kozo & Mairesse, Jacques, 2015. "Product and labor market imperfections and scale economies: Micro-evidence on France, Japan and the Netherlands," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 290-322.
    19. Sabien Dobbelaere & Jacques Mairesse, 2013. "Panel data estimates of the production function and product and labor market imperfections," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 1-46, January.
    20. Benoit Dostie, 2011. "Wages, Productivity and Aging," De Economist, Springer, vol. 159(2), pages 139-158, June.
    21. Amoroso, S., 2013. "Heterogeneity of innovative, collaborative, and productive firm-level processes," Other publications TiSEM f5784a49-7053-401d-855d-1, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Imperfect Competition;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D2 - Microeconomics - - Production and Organizations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-06l10006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.