Total Factor Productivity Measures Research Articles

FIRM PRODUCTIVITY AND INSTITUTIONAL QUALITY: EVIDENCE FROM ITALIAN INDUSTRY

ABSTRACTThis paper aims to contribute to the debate on the determinants of differentials in firms’ productivity. We test the hypothesis that macro factors, especially the quality of local institutions, play a central role in explaining firm productivity in Italy. To this end, we construct measures of Total Factor Productivity (TFP) for about 4,000 firms by means of different estimation techniques, and a province‐level index of institutional quality. Then, we estimate the relationship between institutional quality and firm‐level TFP. Our results show that the existence of better local institutions might help firms to become more productive.

Population distribution, effective area and economic growth

The usual measure for the factor land is the total area. But total area is a flawed measure because land is of unequal quality. To account for land quality, we use an alternative measure called effective area. Effective area is based on spatial population distribution which captures both natural conditions and human activity. Theoretically, effective area explains economic growth better than total area that biases the measure of total factor productivity (TFP) growth. Empirically on the basis of 40 years of panel data for the United States, an increase of 10% in effective area is associated with an economic growth of 5%, and the omission of effective area undervalues the growth of TFP by 8.1%.

Obelix vs. Asterix: Size of US commercial banks and its regulatory challenge

Big banks pose substantial costs to society in the form of increased systemic risk and government bailouts during crises. So the question is: Should regulators limit the size of banks? To answer this question, regulators need to assess the potential costs of such regulations. If big banks enjoy substantial scale economies (i.e., average costs get lower as bank size increases), limiting the size of banks through regulations may be inefficient and likely to reduce social welfare. However, the literature offers conflicting results regarding the existence of economies of scale for the biggest US banks. We contribute to this literature using a novel approach to estimating nonparametric measures of scale economies and total factor productivity (TFP) growth. For US commercial banks, we find that around 73 % of the top one hundred banks, 98 % of medium and small banks, and seven of the top ten biggest banks by asset size exhibit substantial economies of scale. Likewise, we find that scale economies contribute positively and significantly to their TFP growth. The existence of substantial scale economies raises an important challenge for regulators to pursue size limit regulations.

The Dynamics of Productivity Change: A Review of the Bottom-Up Approach

This paper considers the relation between (total factor) productivity measures for lower level production units and aggregates thereof such as industries, sectors, or entire economies. In particular, this paper contains a review of the so-called bottom-up approach, which takes an ensemble of individual production units, be it industries or enterprises, as the fundamental frame of reference. At the level of industries the various forms of shift-share analysis are reviewed. At the level of enterprises the additional features that must be taken into account are entry (birth) and exit (death) of production units.

Assessing Potential Growth in Emerging Countries after the Global Financial Crisis

We examine the growth performance of six emerging economies (Brazil, China, India, Indonesia, Russia and Turkey) in the last two decades and examine whether domestic structural constraints are affecting their present and future growth potential. In order to assess better the determinants of the recent synchronized slowdown of these economies, we concentrate on the dynamics of labor productivity (value added per worker, a synthetic measure of capital deepening, labor quality and total factor productivity) and of employment. We find that the ongoing slowdown in EMEs is largely structural, but there is still ample room for catching up in terms of output composition, reallocation of labor across sectors and within-sector productivity improvements. The scope for further reform and reform priorities differs across countries. In the longer run other structural factors will weigh on potential growth, particularly the evolution of the size and quality of the labor force.

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Editors’ Introduction

Editors’ Introduction

Gains from Offshoring? Evidence from U.S. Microdata

We construct a new linked data set with over one thousand offshoring events by matching Trade Adjustment Assistance program petition data to confidential data on U.S. firm operations. We exploit these data to assess how offshoring affects domestic firm-level aggregate employment, output, wages and productivity. Consistent with heterogenous firm models where offshoring involves a fixed cost, we find that the average offshoring firm is larger and more productive than the average non-offshorer. After initiating offshoring, firms experience large declines in employment (46.2 per cent), output (38.5 per cent) and capital (28.8 per cent) relative to their industry peers. We find no significant change in average wages or in total factor productivity measures for offshoring firms. These results are consistent across two separate difference-in-differences (DID) approaches, an instrumental variables approach, and a number of robustness checks. Thus, we find offshoring to be a strong substitute for domestic activity in this large sample of offshoring events.

Measuring and relating aggregate and subaggregate total factor productivity change without neoclassical assumptions

This article considers the relation between total factor productivity measures for individual production units and those for aggregates such as industries, sectors or economies. This topic has been treated in a number of influential publications, such as Hulten (1978), Gollop (1979) and Jorgenson et al. (1987). What distinguishes this article from other publications in this area is that I deliberately avoid the making of all kinds of (neoclassical) structural and behavioural assumptions, such as the existence of production frontiers with certain properties, or optimizing behaviour of the production units. In addition, I also treat dynamic ensembles of production units, characterized by entry and exit. Thus, a greater level of generality is achieved from which the earlier results follow as special cases.

Partisan Alignment Effects on Total Factor Productivity

Aray H. Partisan alignment effects on total factor productivity, Regional Studies. Unlike the literature on political effects on real economy that suggests that partisan effects accrue through aggregate demand, it is hypothesized that such effects could also accrue through aggregate supply. Using panel data for the Spanish regions over the 1986–2010 period, the main results are: (1) partisan alignment effects only arise when central government enjoys a majority; (2) there exist a positive contemporaneous effect and negative lagged effects; and (3) in absolute value, such effects vanish over time. Results are robust to different specifications and measures of total factor productivity (TFP) and methods of estimation.

‘Green’ productivity growth in China's industrial economy

This paper uses a Directional Distance Function (DDF) and the Malmquist–Luenberger Productivity Index to estimate the changing patterns of ‘green’ total factor productivity (GTFP) growth of 38 Chinese industrial sectors during the period 1980–2010. Unlike the measures of traditional total factor productivity (TFP) growth, the DDF incorporates carbon dioxide emissions as an undesirable output directly into the production technology, which credit sectors for simultaneously reducing their emissions and increasing their output. Our estimates of aggregate and sector-level GTFP growth reveal that Chinese industry is not yet on the path towards sustainable, low-carbon growth. A dynamic panel data analysis of the determinants of GTFP across sectors is used to identify factors that might rectify this situation, including state owned enterprise (SOE) reform, the growth of small private enterprises, continued openness to foreign investment and higher spending on R&D, particularly in emission-intensive sectors.

Solow residuals without capital stocks

We use synthetic data generated by a prototypical stochastic growth model to assess the accuracy of the Solow residual (Solow, 1957) as a measure of total factor productivity (TFP) growth when the capital stock in use is measured with error. We propose two alternative measurements based on current investment expenditures: one eliminates the capital stock by direct substitution, while the other employs generalized differences of detrended data and the Malmquist index. In short samples, these measures can exhibit consistently lower root mean squared errors than the Solow–Törnqvist counterpart. Capital measurement problems are particularly severe for economies still far from their steady state. This drawback of the Solow residual is thus most acute in applications in which its accuracy is most highly valued. As an application, we compute and compare TFP growth measures for developing countries in the Heston–Summers dataset.

Cooperative Rural Banks: Can They Survive? Evidence Using all Cooperative Rural Banks in Sri Lanka

Cooperative rural banks (CRBs) play an important role in providing the rural credit needs offering loans, pawning facilities and savings in rural sector in Sri Lanka. Last few decades even though large number of financial institutions has been increasing in Sri Lanka, CRBs have gained an increasing share of financial assets, which has been particularly helpful for satisfying the growing demand for loans and advances in poor people in the country. However, in general, efficiency of CRBs in Sri Lanka highly criticized today on their performance in poor management of their assets and consequently, the sustainability of these institutions is uncertain. Furthermore, the numbers of failures in formal and informal small financial institutions have been occurred over the past few decades in Sri Lanka, the efficiency of CRBs in Sri Lanka is more concern. This study evaluates the efficiency of CRBs in Sri Lanka by using all CRBs operate in Sri Lanka, 1,193 branches, including North and East provinces. A comparative analysis of the efficiency of CRBs is undertaken by districts by using a Total Factor Productivity measurement, Data envelopment analysis (DEA). It is found that the CRBs in Sri Lanka do not operate efficiently during the period of 2005 to 2010 in providing microcredit activities. This indicates that the survival of CRBs in Sri Lanka in their current form is uncertain in the current financial system. However, the findings suggest that in terms of geographical districts operating, there are significant differences in the efficiency of CRBs. Therefore, the findings of this study contribute to understanding the underlying problems for efficiency in particular all CRBs in Sri Lanka.DOI: http://dx.doi.org/10.4038/kjm.v1i2.6450Kelaniya Journal of Management Vol.1(2) 2012:1-15

Total Factor Productivity Benchmarking in Incentive Regulation: Evidence from Czech Gas Utilities and Implications for Post-Communist Countries

Incentive regulation and regulatory benchmarking are becoming frequently used tools in tariff regulation of public utilities, including natural gas distribution companies. Firstly, we dealt with the principles of incentive regulation and total factor productivity measurement. Then, we discussed the international experience with TFP benchmarking and possible weaknesses of the TFP approach and sources of errors and misinterpretation of results. Further, we determined the productivity development of the Czech regional gas distribution companies in the period 2001-2011 using Fisher index and partial factor productivity analysis. Finally, we summarise the assumptions and measures which should be taken in order to apply TFP benchmarking in practice. We do not recommend using TFP-based tariff setting in the Czech Republic, nor in other post-communist countries. In particular, we argue that the events which took place in the period under consideration resulted in a distortion of available data which disallow their efficient use in tariff regulation at the present time and in the near future. We suggest using the TFP approach rather as an underlying method for further analysis and tariff setting.

Estimating entrants' productivity when prices are unobserved

Entrant firms are constrained to set lower price–cost markups than incumbents due to idiosyncratic demand shocks faced in the startup phase. Productivity indices suffer from micro-level markup variation and underestimate entrants' productivity, when productivity is measured by nominal sales and expenditures but not quantities. This study makes the first attempt to estimate entrants' productivity by controlling for their markup difference, when prices or quantities are unobserved at the firm-level. The econometric methodology introduces demand side into a structural model of production to account for the price variation. The estimation routine deals with the endogeneity due to unobserved productivity using a control function approach, and retrieves average markups for entrants and incumbents together with a markup-adjusted productivity index. My findings show that entrants set on average lower markups than incumbents in Japanese manufacturing. When productivity is adjusted to markups, entrants are as productive as incumbents, while the standard measures of labor and total factor productivity indicate low productivity for entrant firms.

Productive efficiency of the urban informal manufacturing sector in Assam

The paper analyses the productivity growth pattern in the urban informal manufacturing sector of Assam in India. The productivity of the urban informal manufacturing sector of the state is calculated and compared to the national average by using both partial and total factor productivity measures. Total factor productivity growth is taken as the difference between the growth rate in value added and a weighted sum of capital, and labour growth rates, the weights being the share of labour and capital in value added respectively. The index of efficiency of labour is computed for the state and compared to the national levels and is calculated as the difference between the actual growth rate and the desired growth rate of labour productivity. The study finds that positive total factor productivity growth of this sector both at the state as well as at the national level which is an encouraging signal.

Technological Progress and the Earnings of Older Workers

Economists’ standard model assumes that improvements in total factor productivity (TFP) raise the marginal product of labor for all workers evenly. This paper uses an earnings dynamics regression model to study whether, in practice, older workers benefit less from TFP growth than younger workers. We utilize panel earnings data from the Social Security Administration’s Continuous Work History Sample. The data include workers of all ages, and we use annual figures for 1950-2004. Our first specification relies on BLS measurements of TFP. Our second model develops a new TFP measure using a principal components analysis. We find that although the earnings of younger workers track TFP growth 1-for-1, the earnings of older workers do not: we find, for example, that a 60-year-old male’s earnings grow only 85-90% as fast as TFP. Nevertheless, our analysis implies that in an economy with an aging labor force, gains from experience tend to outweigh older workers’ inability to benefit fully from TFP improvements.

A total factor productivity measure for the construction industry and analysis of its spatial difference: a case study in China

In the context of unbalanced regional economic development in China, there are large regional differences in the development of the construction industry. These long-standing and increasing differences not only influence the total productivity of China’s construction industry but also hinder effective resource distribution. Total factor productivity (TFP) is a measure of long-term economic growth and a comprehensive industry-level productivity measure. The objectives are to put forward a set of systematic methodologies for selecting a productivity index, to develop a TFP measure for the construction industry and to conduct an analysis of spatial differences. First, the input and output index system of the construction industry is established, and China’s construction industry TFP is measured with the DEA–Malmquist index. Second, spatial differences in the construction industry TFP are analysed in terms of the coefficient of variation (CV) and using spatial clustering analysis. The results indicate that China’s construction industry TFP has improved steadily. This improvement has been due mainly to improvements in pure technology efficiency, technological progress and scale efficiency. In the past five years, the CV of China’s construction industry productivity has generally been small and has changed only slightly. China’s construction industry TFP for all regions exhibits a ladder-like distribution that is different from the distribution by economic areas among the central, western and eastern regions.

Measuring the Impact of the Global Financial Crisis on Efficiency and Productivity of the Banking System in South Africa

South Africa`s financial sector is believed to have weathered the contagion and catastrophic effects of the 2008 worldwide financial crisis partly on account of a sound regulatory framework and solid macroeconomic policies. In this paper, we seek to measure efficiency and productivity changes during the period of the crisis through an analysis of bank performance over the period 2000 – 2010 using a two stage methodology framework. The recently developed Hicks-Moorsteen total factor productivity (TFP) index approach developed by O`Donnell as opposed to the popular Malmquist TFP was utilised. Our first stage results showed that during the crisis period there was a noticeable but mild deviation of total factor productivity and efficiency measures. Second stage analysis using the censored Tobit model showed that the financial crisis was the main determinant of bank efficiency, indicating that total factor productivity efficiency was 16.96% lower during the crisis period compared to the pre-crisis period. DOI: 10.5901/mjss.2013.v4n6p553

Agglomeration economies with consistent productivity estimates

This paper investigates the relative impact of microeconomic agglomeration mechanisms on plant's total factor productivity (TFP) using German establishment and employment-level data. Contrasting different strategies for estimating TFP from plant-level production functions reveals that unobserved output prices bias true productivity and lead to underestimated agglomeration economies. With the corrected TFP measure, the largest impact is found for labor market pooling, which is captured by the correlation of the occupational composition between one county-industry and the rest of the county. This main result is robust, even when the spatial units are resized from counties to larger labor market regions. Input linkages appear to be relevant only at this larger regional scale. Overall, agglomeration economies differ substantially across industries. Only for a subset of industries, some positive evidence is detected for knowledge spillovers.