applications, like ours, quantities of output and some inputs are replaced with values.
The main reason to use values instead of quantities is that, at the firm level, products are
heterogeneous and quantities cannot be directly aggregated or compared. As a result, as
Klette and Griliches (1996) have pointed out30, the estimators from a production
function regressions using sales are inconsistent. The problem comes from the fact that
the value of output does not depend only on technology but includes both prices and
quantities. While quantities can be directly linked to inputs through the production
function, prices are the equilibrium outcome resulting from the interaction of supply and
demand. Therefore, price times quantity is not reflecting just the production side but it
also includes demand and market structure. For this, the above TFP estimates cannot be
considered as pure measures of efficiency in production but more as measures of
“efficiency in generating value of output”31. As a result, measured productivity it is
likely to capture profitability in a broader sense rather than strict technical efficiency.
Keeping this in mind, we can still meaningfully employ in our analysis the TFP
measures obtained by means of production function estimates using sales as proxy for
output. In fact, the choices on import, export and diversification depend on expected
profits. Profits will, on turn, depend both on productive efficiency and on the demand
side, therefore using a measure of performance that captures profitability instead of
productive efficiency will not bias the results.
5.2 Empirical Strategy and Results
The second step of our analysis consists on the estimations of the relationship between
trade practices and productivity. The baseline specification will be
TFPit = α0 +α1Xit + α2Yit + α3ki +α4ht +νit (8)
30 In their study on returns to scale estimates.
11 To address this problem few authors (Melitz 2000, and Katayama, Lu and Tybout 2003) have started
introducing information about the demand and market structure into the estimation. They show that firms
that face a more inelastic demand are able to charge higher prices and they appear to be more productive
according to the TFP estimates
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