Abstract
AbstractWe estimate firm productivity and markups in the presence of heterogeneous output and input prices. We assume that firms are monopolistically competitive in the output market and that state firms are favored and pay lower prices for inputs due to political connections. The proxy‐variable (or called the control‐function‐based) approach of structurally identifying production functions and productivity is customized to our new setting. Our approach solves the underidentification problem inherent in the standard proxy‐variable method. We investigate the Chinese transportation equipment industry and find evidence against perfect competition and price homogeneity. We also find that productivity and markup differentials and dynamics are consistent with the market‐oriented reforms in China.
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