Micro-Production Functions Aren't Pretty: Firm-Level and Industry-Level Specification For Inputs and Outputs

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This study documents extreme variations in productivity within a panel of eleven firms in the same narrowly defined industry classification. Many of the sources of this variation were identified in field investigations of each plant.These investigations in turn allowed for the development of detailed specifications for inputs and outputs using data collected from the sites. The empirical estimates show that, irrespective of the precise functional form adopted, these detailed specifications, particularly those for output heterogeneity, are critical determinants of the performance of plant-level production functions. When the most detailed input and output specifications are used, 95% of the observed variation in plant production is explained. However, when the eleven firms are treated as an industry, less detailed specifications for inputs and outputs are shown to be more appropriate for explaining the variation in industry production.

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