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    Trade PDL Slides

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    Hector Perez Saiz
    This lecture discusses challenges in estimating firm-level productivity and proposes methods to address them. It outlines issues like simultaneity bias, selection bias, and unobserved prices/markups. It then presents the Olley-Pakes and Levinsohn-Petrin approaches to control for these. The method uses variation in firm-level exposure to trade shocks to identify productivity and markups, controlling for demand shocks. Productivity is estimated by backing out estimates of factor demand parameters and markups from production function estimates.

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    Trade PDL Slides

    Uploaded by

    Hector Perez Saiz
    38 views15 pages
    This lecture discusses challenges in estimating firm-level productivity and proposes methods to address them. It outlines issues like simultaneity bias, selection bias, and unobserved prices/markups. It then presents the Olley-Pakes and Levinsohn-Petrin approaches to control for these. The method uses variation in firm-level exposure to trade shocks to identify productivity and markups, controlling for demand shocks. Productivity is estimated by backing out estimates of factor demand parameters and markups from production function estimates.

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    This lecture discusses challenges in estimating firm-level productivity and proposes methods to address them. It outlines issues like simultaneity bias, selection bias, and unobserved prices/markups. It then presents the Olley-Pakes and Levinsohn-Petrin approaches to control for these. The method uses variation in firm-level exposure to trade shocks to identify productivity and markups, controlling for demand shocks. Productivity is estimated by backing out estimates of factor demand parameters and markups from production function estimates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    38 views15 pages

    Trade PDL Slides

    Uploaded by

    Hector Perez Saiz
    This lecture discusses challenges in estimating firm-level productivity and proposes methods to address them. It outlines issues like simultaneity bias, selection bias, and unobserved prices/markups. It then presents the Olley-Pakes and Levinsohn-Petrin approaches to control for these. The method uses variation in firm-level exposure to trade shocks to identify productivity and markups, controlling for demand shocks. Productivity is estimated by backing out estimates of factor demand parameters and markups from production function estimates.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 15

    ECON 357

    Lecture 6: estimating …rm level productivity

    Thomas Chaney

    University of Chicago

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 1 / 15


    Estimating …rm-level productivity

    Qit = F (Lit , Mit , Kit ) exp (ω it + uitq )

    Lit , Mit variable factors of production (labor and intermediates).


    Kit capital stock.
    ω it …rm level productivity (unobserved).
    uit unobserved shocks.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 2 / 15


    Empirical challenges

    1 Simultaneity bias:
    ω it a¤ects both productivity and input choices.
    β and βk biased upwards.
    2 Selection bias:
    if low productivity realization, …rms with more kit more likely to survive.
    ) sprurious negative correlation between capital and productivity.
    βk biased downward.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 3 / 15


    Additional challenges

    Qit = F (Lit , Mit , Kit ) exp (ω it + uitq )

    1 Unobserved prices and mark-ups.


    Traditional method: de‡ate sales (rit ) by industry prices (pIt ).
    Problem: (pit pIt ) 6= 0 induces bias.
    2 Problem: if trade a¤ects prices and mark-ups, impact of trade on
    productivity misidenti…ed.
    Note 1: we will assume Cobb-Douglas for F ( ).
    Note 2: we will assume CES demand system.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 4 / 15


    Tentative solutions

    1 Olley-Pakes: use investment decision to control for simultaneity and


    selection bias.
    2 Levinsohn-Petrin: use intermediate inputs instead.
    3 de Loecker: use variation in …rm-level exposure to trade shocks to
    identify mark-ups.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 5 / 15


    CES demand system

    ηs
    Pjt
    Qjt = Qst exp ξ jt + ujtq
    Pst

    Good j in segment s.
    ξ jt : unobserved demand shock (may be correlated with price).
    ujtq : i.i.d. demand shock.
    ηs
    Note: constant mark-up ηs 1 .

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 6 / 15


    Empirical challenges: summary

    (
    r̃it = β0 + βl lit + βm mit + βk kit + βs qst + ω it + ξ it + εit
    ηs 1
    with βh = ηs 1 αh , h = fl, m, k g , βs = ηs .

    ω it unobserved and correlated with input choices.


    non random exit of …rms (biases estimate of βk ).
    demand shock ξ it correlated with input choice.
    aggregate demand shifter correlated with unobserved demand
    conditions.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 7 / 15


    Multi-product dimension

    Qijt = (cijt )γ Qit


    with ∑j 2J (i ) cijt h =c
    = 1 and cijt ijt for h = fl, m, k g .

    Firms split up their production between di¤erent products.


    Assumption: same factor intensities for all inputs.
    γ measures returns to scale.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 8 / 15


    Multi-product production function

    r̃it = β0 + βl lit + βm mit + βk kit +


    !
    5
    + ∑ βs (sis qst ) + ln ∑ (cijt )γ/η
    s =1 j 2J (i )

    + ω it + ξ it + εit

    Demand shocks di¤er across segments (qst ), and …rms di¤er in their
    exposure to those shocks (sis ).

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 9 / 15


    Estimation strategy

    Investment function can be inverted:

    ω it = ht (iit , kit , qrit , npi )

    qrit represents …rm i’s exposure to quota reduction, npi number of


    products.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 10 / 15


    Estimation
    First stage: (use a polynomial approximation for h̃)

    r̃it = β0 + βl lit + βm mit + βk kit


    5
    + ∑ βs (sis qst ) + ∑ δj Dij + ∑ δg Dig + φ̃t (iit , kit , qrit , npi ) + εit
    s =1 j 2J (i ) g 2G (i )

    φ̃t (iit , kit , qrit , npi ) = βk kit + h̃t (iit , kit , qrit , npi )
    b̃ . Note: η̂ = 1/ β̂ .
    ) get β̂l , β̂m , β̂s , δ̂j , δ̂g , φ it s s
    Second stage: (use a polynomial approximation for g )
    5
    r̃it β̂l lit β̂m mit ∑ β̂s (sis qst ) ∑ δ̂j Dij ∑ δ̂g Dig
    s =1 j 2J (i ) g 2G (i )

    b̃
    = β0 + βk kit +1 + gt φ βk kit + ξ̃ it +1 + ζ it +1 + εit +1
    it

    ) get β̂k .
    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 11 / 15
    Key steps in the estimation

    Control for endogenous choice of k and endogenous selection


    (unbiased β’s).
    Control for mark-ups (η ).
    Control for simultanuous impact of demand shocks on input choices,
    prices, quantities and selection.
    Method:
    1 use …rm level variation in demand induced by di¤erent trade shocks.
    2 invert investment equation to control for choice of capital.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 12 / 15


    Backing out productivity

    η̂ s
    ω̂ it = ∑ sis r̃it β̂l lit β̂m mit β̂k kit β̂s (sis qst )
    η̂ s 1
    s

    Key estimates to uncover ω are β’s and η.


    Note that segment and sub-segment …xed e¤ects can a¤ect
    productivity.

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 13 / 15


    Impact of trade on productivity

    ω̂ it = λ0 + λ1 qrit + controls + εit

    Di¤erent estimates of ω̂ will give di¤erent answers.


    If quotas a¤ect demand, not controlling for the impact of quotas on
    demand will overestimate λ1 .

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 14 / 15


    Impact of trade on productivity

    Figure: Jan de Loecker (2009)

    Thomas Chaney (Chicago) ECON 357: Lecture 6 (de Loecker) 15 / 15

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