The link between productivity and output is in general undetermined. First, it is a function
of technology. With increasing returns to scale, higher output may result in higher productivity.
Second, this link hinges on the reaction of firms to changing incentives. For instance, firms
facing negative price shocks could respond by reducing output and also cutting x-inefficiencies
and improving productivity. In the case where devaluation brings a positive price shock and
higher output, it may nonetheless boost export orientation and expose firms to a more
competitive environment. The inclusion of output growth in our equation is meant to capture
some of these scale effects.
We estimate the output and productivity growth equations as a system of simultaneous
equations to control for the endogeneity of these two variables. Table 3 contains the results of
the two-stage least square estimation of the output equation, where we control for the possible
endogeneity of productivity growth. Table 4 reports the estimates of the productivity growth
equation.
15
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