TY - JOUR AU - Basu,Susanto AU - Pascali,Luigi AU - Schiantarelli,Fabio AU - Serven,Luis TI - Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 15579 PY - 2009 Y2 - December 2009 UR - http://www.nber.org/papers/w15579 L1 - http://www.nber.org/papers/w15579.pdf N1 - Author contact info: Susanto Basu Department of Economics Boston College 140 Commonwealth Avenue Chestnut Hill, MA 02467 Tel: 617/552-2182 Fax: 617/552-2308 E-Mail: susanto.basu@bc.edu Luigi Pascali Department of Economics Universitat Pompeu Fabra Ramon Trias Fargas, 25-27 08005-Barcelona E-Mail: luigi.pascali@upf.edu Fabio Schiantarelli Department of Economics Boston College 140 Commonwealth Avenue Chestnut Hill, MA 02467 Tel: 617-5524512 Fax: 617-5522308 E-Mail: schianta@bc.edu Luis Serven The World Bank 1818 H St NW Washington DC 20433 Tel: 202 473 7451 E-Mail: lserven@worldbank.org AB - We prove that in a closed economy without distortionary taxation, the welfare of a representative consumer is summarized to a first order by the current and expected future values of the Solow productivity residual in level and by the initial endowment of capital. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. We show how these results must be modified if the economy is open or if taxes are distortionary. We then compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that re.ect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries. ER -