Productivity and reallocation under monopolistic competition: A Micro panel data analysis

Abstract

AbstractThis article studies the structural aggregate productivity growth (APG) decomposition with demand‐ and supply‐side controls, determines comparative statics predictions for firms and economic outcomes and examines patterns of input distortions. By moving from price‐taking conditions to markets featuring markup heterogeneity for product varieties, the paper finds amplification of production inefficiency from −3.61% to −11.41% and amplification of total factor reallocation from 0.15% to 8.91%. The productivity results are robust to structural variations in the demand function, firm scale adjustment and firm growth. Similarly, input reallocation is robust to variation in demand structure and plant expansion. Furthermore, reallocation under common markups among all firms is robust to reallocation under heterogeneous markups among larger firms. Alternatively, large firms face demand inelasticities and charge higher markups thereby mimicking the behaviour of the survey of all firms. Under autarky, small unproductive plants charge higher markups than their small efficient counterparts. Demand elasticity increases (decreases) with industry output for smaller (larger) plants. Finally, a unit increase in capital intensity for resource‐constrained plants raises labour distortions and reduces capital distortions while reducing capital distortions for resource‐unconstrained firms.