TY - JOUR AU - Foster,Lucia AU - Haltiwanger,John AU - Syverson,Chad TI - Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? JF - National Bureau of Economic Research Working Paper Series VL - No. 11555 PY - 2005 Y2 - August 2005 UR - http://www.nber.org/papers/w11555 L1 - http://www.nber.org/papers/w11555.pdf N1 - Author contact info: Lucia Foster Center for Economic Studies Census Bureau Room 211/WP11 Washington, DC 20233-6300 Tel: 301-763-6444 Fax: Senior Economist E-Mail: lucia.s.foster@census.gov John C. Haltiwanger Department of Economics University of Maryland College Park, MD 20742 Tel: 301/405-3504 Fax: 301/405-3542 E-Mail: haltiwan@econ.umd.edu Chad Syverson University of Chicago Booth School of Business 5807 S. Woodlawn Ave. Chicago, IL 60637 Tel: 773/702-7815 Fax: 773/702-8490 E-Mail: chad.syverson@chicagobooth.edu M2 - featured in NBER digest on 2005-08-15 AB - There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high "productivity" businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth. ER -