TY  - JOUR
AU  - Levinsohn,James
AU  - Petrin,Amil
TI  - When Industries Become More Productive, Do Firms?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6893
PY  - 1999
Y2  - January 1999
UR  - http://www.nber.org/papers/w6893
L1  - http://www.nber.org/papers/w6893.pdf
N1  - Author contact info:
James A. Levinsohn
Yale School of Management
PO Box 208200
New Haven, CT  06520
Tel: 734/763-2319
Fax: 734/764-2769
E-Mail: James.Levinsohn@yale.edu

Amil Petrin
Department of Economics
University of Minnesota
4-101 Hanson Hall
Minneapolis, MN 55455
Tel: 612/625-0145
Fax: 612/624-0209
E-Mail: petrin@umn.edu
AB  - This paper investigates two explanations for why industries might become more productive over time.  The first explanation, termed the  real productivity case,' is one in which firms become more productive and this leads to more productive industries.  The second explanation, termed the  rationalization case,' is one in which firm productivity is constant, but productive firms expand while less productive firms either shrink or exit.  Each case has very different implications for factor markets, long term growth prospects, and public policy regarding productivity.  Further, one can only distinguish between these two cases with plant- or firm-level data.  We investigate the empirical relevance of the two cases using the Chilean manufacturing census.  We find that the rationalization case explains much of the measured increase in industry productivity.  When industry productivity fails, the rationalization case appears much less important.  We also contribute to the applied econometric literature on productivity estimation as we show that the value-added production function is especially well-suited to a simple extension of recent methods developed by Oiley and Pakes.
ER  -