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

Author

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  • 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
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    File URL: http://www.accessecon.com/pubs/EB/2006/Volume12/EB-06L10006A.pdf
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    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. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
    3. 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.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    5. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
    6. 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..
    7. repec:bla:jindec:v:47:y:1999:i:4:p:451-76 is not listed on IDEAS
    8. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    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. 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.
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    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.

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    More about this item

    Keywords

    Imperfect Competition;

    JEL classification:

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

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