Dynamic Olley-Pakes productivity decomposition with entry and exit

By Marc J. Melitz, Sašo Polanec. 2015

415 citations recorded by the source corpus.

In this paper, we propose an extension of the productivity decomposition method developed by Olley & Pakes (1996). This extension provides an accounting for the contributions of both firm entry and exit to aggregate productivity changes. It breaks down the contribution of surviving firms into a component accounting for changes in the firm-level distribution of productivity and another accounting for market share reallocations among those firms - following the same methodology as the one proposed by Olley & Pakes (1996). We argue that the other decompositions that break-down aggregate productivity changes into these same four components introduce some biases in the measurement of the contributions of entry and exit. We apply our proposed decomposition to the large measured increases of productivity in Slovenian manufacturing during the 1995-2000 period and contrast our results with those of other decompositions. We find that, over a 5-year period, the measurement bias associated with entry and exit is substantial, accounting for up to 10 percentage points of aggregate productivity growth. We also find that market share reallocations among surviving firms played a much more important role in driving aggregate productivity changes.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/80c1dc00ea1037ed1f664a54ae38e3189be0ff01

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Citations in the corpus

Changing Business Dynamism and Productivity: Shocks vs. Responsiveness (2018, methodology): “50 Alon et al. (2017) also use the Dynamic Olley Pakes decomposition method described by Melitz and Polanec (2015) to study the productivity slowdown.”
Firm Dynamics, Productivity Growth, and Job Creation in Developing Countries: The Role of Micro- and Small Enterprises (2015, neutral): “For example, Nelson (1981) treated firms as entities that make technological bets with inherent uncertainties and end up with different productivities.”
THE INNOVATIONâ€ EMPLOYMENT NEXUS: A CRITICAL SURVEY OF THEORY AND EMPIRICS (2016, neutral): “For a recent discussion on the pros and cons of alternative decomposition methods, and more in-depth analysis of the entry and exit dynamics see Melitz and Polanec (2015).”
The New Empirical Economics of Management (2014, neutral): “There are multiple ways in which to perform such statistical decompositions of industry productivity growth into within and between components - see, for example, Olley and Pakes (1996), Foster, Haltiwanger, and Krizan (2001) and more recently, Melitz and Polanec (2013).”
JEEA‐FBBVA LECTURE 2013: THE NEW EMPIRICAL ECONOMICS OF MANAGEMENT (2014, background): “There are multiple ways in which to perform such statistical decompositions of industry productivity growth into within and between components—see, for example, Olley and Pakes (1996), Foster, Haltiwanger, and Krizan (2001), and more recently, Melitz and Polanec (2013).”
The Multiprod project: A comprehensive overview (2017, methodology): “The access to firm-level data across multiple countries allows us to conduct an extensive examination of allocative efficiency over time and across countries, applying a number of different methods, among them: the Olley and Pakes (1996) static productivity decomposition, as well as a dynamic versio”