Lucia Foster (Center for Economic Studies, U.S. Census Bureau), John Haltiwanger, Chad Syverson

Reallocation, Firm Turnover and Efficiency: Selection on Productivity or Profitability

A pervasive finding in the burgeoning literature using business microdata is that firm turnover is high and that this churning process contributes substantially to aggregate (industry) productivity growth, as more productive entrants appear to displace less productive exiting businesses. A limitation of this research is that establishment-level prices are typically unobserved, resulting in within-industry price differences being embodied in productivity measures. If prices reflect idiosyncratic demand shifts or market power variation, high “productivity” businesses may not be particularly efficient. In this case, the literature’s findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. This distinction is important not only for the sake of understanding the positive features of selection, but the normative ones as well; whether selection is driven by efficiency or market power differences has important welfare implications. In this paper, we investigate the nature of selection using data from industries where we observe both establishment-level quantities and prices. We find that, as has been found in the preceding literature for revenue-based TFP measures, physical productivity and prices also exhibit considerable within-industry variation. We also show that while physical productivity shares common traits with revenue-based measures, there are important differences. These involve the productivity levels of entrants relative to incumbents and the size of the impact of net entry on productivity aggregates. Furthermore, we characterize the dimension(s) of selection and show that both idiosyncratic productivity and demand (price) conditions affect businesses’ survival probabilities.

We investigate these issues for the U.S. manufacturing sector using establishment-level data for industries where we observe both establishment level quantities and prices. We explore the nature of the selection dynamics in these industries ? i.e., is selection on productivity or profitability? We also calculate the degree of inefficiency of the reallocation dynamics. Moreover, since the nature of imperfect competition may vary across markets (i.e., local areas and/or industries) we quantify the extent of variation in the nature of imperfect competition across markets and the importance of such variation for understanding the connection between reallocation and productivity growth.

Keywords: Productivity, Establishment-Level Data

JEL Codes: J2, L1, O4

Session: 1d   Room 2004   Category: Business demographics and performance 1

Paper