Markups, Productivity, and Export Dynamics
The goal of this paper is to efficiently recover consistent markups from firm-level production technology under cost minimization settings
Abstract
The primary goal of this paper is to efficiently recover consistent markups from firm-level production technology under cost minimization settings in order to document the relationship between unobserved idiosyncratic productivity shocks and endogenous markups. It further documents the relationship between a firm‟s export status and its markup and productivity patterns to understand the performance premia of producers. The paper uses the proxy approach combined with the generalized method of moments (GMM) to estimate various production technologies in order to expunge input elasticities and estimate markups based on flexible inputs. This investigation finds that the conventional labour input-based markup estimates suffer from high labour adjustment costs and potentially other labour market frictions during the period 1994-2007, resulting in a negative correlation with the intermediate input-based alternative. An assessment of the intermediate input-based markup shows that there is substantial variability in all but one entropy index measure of markup dispersion while productivity attains a general entropy index that approaches zero. The effect of intermediate input-based markups on unobserved productivity shocks is significantly positive when estimated using previous exports as an instrumental-variable (IV) in a Two-Stage Least Squares (TSLS) regression accompanied by the Wild Restricted Efficient (WRE) residual bootstrap. Furthermore, both markups and productivity are separately correlated with export status while producers enjoy considerable performance premia from various components of export participation. Finally, a firm‟s product markup and its productivity have no effect on its decision to either breakthrough into export markets or abandon export participation.
This work is part of the Private Enterprise Development in Low Income Countries (PEDL) programme
Citation
Mhlanga, S. “Markups, Productivity, and Export Dynamics” Working Paper