Firm dynamics and productivity: TFPQ, TFPR, and demand-side factors

Two common findings in the firm dynamics literature are that there is large dispersion across firms in productivity within narrowly defined industries and that firms that are high in the within-industry distribution are more likely to survive and grow. These findings underlie a rich class of models relating the level and growth of aggregate (industry-level) productivity to the reallocation of resources away from less productive to more productive firms. While these findings are common, there are a variety of empirical measures of firm-level total factor productivity that have been used in the literature to generate these findings. These include measures that are closer to the concepts of technical efficiency common in many models to measures that encompass demand-side factors as well. In addition, the recent literature has developed methods to extract measures of distortions from specific measures of dispersion in productivity given assumptions about the production and demand functions in the economy. In this paper, I discuss the relationship between the alternative measures that have been proposed and used in the literature and, in turn, the implications of these relationships for our understanding of observed firm dynamics. JEL classifications: D61, E23, O47