IDEAS home Printed from https://ideas.repec.org/a/wly/emetrp/v88y2020i6p2415-2444.html
   My bibliography  Save this article

Why Is Productivity Correlated With Competition?

Author

Listed:
  • Matthew Backus

Abstract

The correlation between productivity and competition is an oft observed but incompletely understood result. Some suggest that there is a treatment effect of competition on measured productivity, for example, through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready‐mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I look for evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semiparametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped instrumental variable quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.

Suggested Citation

  • Matthew Backus, 2020. "Why Is Productivity Correlated With Competition?," Econometrica, Econometric Society, vol. 88(6), pages 2415-2444, November.
  • Handle: RePEc:wly:emetrp:v:88:y:2020:i:6:p:2415-2444
    DOI: 10.3982/ECTA12926
    as

    Download full text from publisher

    File URL: https://doi.org/10.3982/ECTA12926
    Download Restriction: no

    File URL: https://libkey.io/10.3982/ECTA12926?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marc J. Melitz & Sašo Polanec, 2015. "Dynamic Olley-Pakes productivity decomposition with entry and exit," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 362-375, June.
    2. Nicholas Bloom & Mirko Draca & John Van Reenen, 2016. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 87-117.
    3. 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.
    4. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 245-276.
    5. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Entry costs, industry structure, and cross-country income and TFP differences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1828-1851, September.
    6. Nalebuff, Barry J & Stiglitz, Joseph E, 1983. "Information, Competition, and Markets," American Economic Review, American Economic Association, vol. 73(2), pages 278-283, May.
    7. Jose E. Galdon Sanchez & James A. Schmitz, 2003. "Competitive pressure and labor productivity: world iron ore markets in the 1980s," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 27(Spr), pages 9-23.
    8. Bottasso, Anna & Sembenelli, Alessandro, 2001. "Market power, productivity and the EU Single Market Program: Evidence from a panel of Italian firms," European Economic Review, Elsevier, vol. 45(1), pages 167-186, January.
    9. Timothy Dunne & Shawn Klimek & James Schmitz, Jr., 2010. "Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry," Working Papers 10-29, Center for Economic Studies, U.S. Census Bureau.
    10. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    11. Ulrich Doraszelski & Mark Satterthwaite, 2010. "Computable Markov‐perfect industry dynamics," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 215-243, June.
    12. Enghin Atalay, 2014. "Materials Prices And Productivity," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 575-611, June.
    13. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    14. 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..
    15. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    16. Allan Collard-Wexler & Jan De Loecker, 2015. "Reallocation and Technology: Evidence from the US Steel Industry," American Economic Review, American Economic Association, vol. 105(1), pages 131-171, January.
    17. David R. Graham & Daniel P. Kaplan & David S. Sibley, 1983. "Efficiency and Competition in the Airline Industry," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 118-138, Spring.
    18. Nicholas Bloom & Erik Brynjolfsson & Lucia Foster & Ron Jarmin & Megha Patnaik & Itay Saporta-Eksten & John Van Reenen, 2017. "What drives differences in management?," CEP Discussion Papers dp1470, Centre for Economic Performance, LSE.
    19. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    20. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    21. Sivadasan Jagadeesh, 2009. "Barriers to Competition and Productivity: Evidence from India," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-66, September.
    22. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    23. Green, Alison & Mayes, David, 1991. "Technical Inefficiency in Manufacturing Industries," Economic Journal, Royal Economic Society, vol. 101(406), pages 523-538, May.
    24. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    25. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    26. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 191-213.
    27. Hay, Donald A & Liu, Guy S, 1997. "The Efficiency of Firms: What Difference Does Competition Make?," Economic Journal, Royal Economic Society, vol. 107(442), pages 597-617, May.
    28. James A. Schmitz Jr., 2005. "What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 582-625, June.
    29. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372, National Bureau of Economic Research, Inc.
    30. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    31. Kira R. Fabrizio & Nancy L. Rose & Catherine D. Wolfram, 2007. "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency," American Economic Review, American Economic Association, vol. 97(4), pages 1250-1277, September.
    32. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    33. Chad Syverson, 2004. "Product Substitutability and Productivity Dispersion," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 534-550, May.
    34. Allan Collard-Wexler, 2010. "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry," 2010 Meeting Papers 105, Society for Economic Dynamics.
    35. Denis Chetverikov & Bradley Larsen & Christopher Palmer, 2016. "IV Quantile Regression for Group‐Level Treatments, With an Application to the Distributional Effects of Trade," Econometrica, Econometric Society, vol. 84, pages 809-833, March.
    36. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    37. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    38. Shawn Klimek & James Schmitz & Timothy Dunne, 2010. "Does Foreign Competition Spur Productivity? Evidence From Post WWII U.S. Cement Manufacturing," 2010 Meeting Papers 805, Society for Economic Dynamics.
    39. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    40. Michael Perelman, 2011. "Retrospectives: X-Efficiency," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 211-222, Fall.
    41. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    42. Thomas J. Holmes & James A. Schmitz, 2010. "Competition and Productivity: A Review of Evidence," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 619-642, September.
    43. Adelman, M A, 1969. "Comment on the "H" Concentration Measure as a Numbers-Equivalent," The Review of Economics and Statistics, MIT Press, vol. 51(1), pages 99-101, February.
    44. Allan Collard‐Wexler, 2013. "Demand Fluctuations in the Ready‐Mix Concrete Industry," Econometrica, Econometric Society, vol. 81(3), pages 1003-1037, May.
    45. Daniel A. Ackerberg & Kevin Caves & Garth Frazer, 2015. "Identification Properties of Recent Production Function Estimators," Econometrica, Econometric Society, vol. 83, pages 2411-2451, November.
    46. Victor Chernozhukov & Christian Hansen, 2005. "An IV Model of Quantile Treatment Effects," Econometrica, Econometric Society, vol. 73(1), pages 245-261, January.
    47. Ulrich Doraszelski & Jordi Jaumandreu, 2013. "R&D and Productivity: Estimating Endogenous Productivity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1338-1383.
    48. John Asker & Allan Collard-Wexler & Jan De Loecker, 2014. "Dynamic Inputs and Resource (Mis)Allocation," Journal of Political Economy, University of Chicago Press, vol. 122(5), pages 1013-1063.
    49. 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.
    50. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    51. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-216, March.
    52. Chad Syverson, 2008. "Markets: Ready-Mixed Concrete," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 217-234, Winter.
    Full references (including those not matched with items on IDEAS)

    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. Florin Maican & Matilda Orth, 2017. "Productivity Dynamics and the Role of ‘Big-Box’ Entrants in Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 397-438, June.
    2. Van Reenen, John, 2011. "Does competition raise productivity through improving management quality?," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 306-316, May.
    3. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    4. Maican, Florin & Orth, Matilda, 2015. "A dynamic analysis of entry regulations and productivity in retail trade," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 67-80.
    5. Maican, Florin G., 2012. "From Boom to Bust and Back Again: A dynamic analysis of IT services," Working Papers in Economics 543, University of Gothenburg, Department of Economics.
    6. Jan De Loecker & Johannes Van Biesebroeck, 2016. "Effect of International Competition on Firm Productivity and Market Power," NBER Working Papers 21994, National Bureau of Economic Research, Inc.
    7. Eslava, Marcela & Haltiwanger, John C. & Kugler, Adriana & Kugler, Maurice, 2009. "Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia," IZA Discussion Papers 4256, Institute of Labor Economics (IZA).
    8. Maican, Florin & Orth, Matilda, 2021. "Determinants of economies of scope in retail," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    9. Tomlin, Ben, 2014. "Exchange rate fluctuations, plant turnover and productivity," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 12-28.
    10. Fieler, Ana Cecília & Harrison, Ann E., 2023. "Escaping import competition in China," Journal of International Economics, Elsevier, vol. 145(C).
    11. Enrico De Monte, 2020. "Entry, Exit and Productivity: Evidence from French Manufacturing Firms," Working Papers of BETA 2020-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    12. Jose Asturias & Sewon Hur & Timothy J. Kehoe & Kim J. Ruhl, 2023. "Firm Entry and Exit and Aggregate Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 48-105, January.
    13. Mauro Caselli & Arpita Chatterjee & Shengyu Li, 2023. "Productivity and Quality of Multi-product Firms," Discussion Papers 2023-10, School of Economics, The University of New South Wales.
    14. Bos, J.W.B. & van Santen, P.C. & Schilp, P., 2013. "The importance of reallocation for productivity growth: Evidence from European and US banking," Research Memorandum 056, Maastricht University, Graduate School of Business and Economics (GSBE).
    15. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2009. "Products and Productivity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 681-709, December.
    16. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    17. Emanuele Forlani & Ralf Martin & Giordano Mion & Mirabelle Muûls, 2023. "Unraveling Firms: Demand, Productivity and Markups Heterogeneity," The Economic Journal, Royal Economic Society, vol. 133(654), pages 2251-2302.
    18. Pierre‐Philippe Combes & Gilles Duranton & Laurent Gobillon & Diego Puga & Sébastien Roux, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection," Econometrica, Econometric Society, vol. 80(6), pages 2543-2594, November.
    19. 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.
    20. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.

    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

    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:wly:emetrp:v:88:y:2020:i:6:p:2415-2444. 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: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    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.