the problem of interpreting the statistical results from cross-sectional estimates arises if and only if
the unobserved (therefore unmeasured) firm variables are correlated with the included explanatory
variables. For example, if managerial ability - a typically unobserved firm variable - were unrelated
to the age of managers, then leaving it out of the empirical analysis would not be a major problem.
This may or may not be the case though. If managerial ability is not observed and therefore omitted
from the analysis but it turns out to be correlated with some included variable such as the age of
managers, its effect may be picked up by the negative estimated relation between high-age
managers and productivity. We would be misperceiving the effect of managerial ability on
productivity as if it were the causal effect of age on productivity. To tackle this problem, we control
for a few dummy variables that capture some, though presumably not all, of the unobserved
determinants of firm productivity.
References
Autor, David H., Frank Levy, and Richard J. Murnane (2003): “The Skill Content of Recent
Technological Change: An Empirical Exploration”, Quarterly Journal of Economics, Vol. 118, No.
4, pp. 1279-1333.
Bandiera, Oriana, Luigi Guiso, Andrea Prat and Raffaella Sadun (2008): “Italian managers: fidelity
or performance?” Report presented at the Annual Rodolfo De Benedetti Foundation Conference
“The ruling class”, September.
Brown, James R., Steven M. Fazzari, and Bruce C. Petersen (2009): “Financing Innovation and
Growth: Cash Flow, External Equity, and the 1990s R&D Boom”, Journal of Finance, Vol. 64, No.
1, pp.151-185.
Capitalia-Unicredit (2004): IXth Survey on Manufacturing Firms.
Comin, Diego and Bart Hobijn (2009): “Lobbies and Technology Diffusion”, Review of Economics
and Statistics, Vol. 91, No. 2, pp. 229-244.
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