Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Sep, 2011, Volume 79, Issue 5

Product Differentiation, Multiproduct Firms, and Estimating the Impact of Trade Liberalization on Productivity
p. 1407-1451

Jan De Loecker

This paper studies whether removing barriers to trade induces efficiency gains for producers. Like almost all empirical work which relies on a production function to recover productivity measures, I do not observe physical output at the firm level. Therefore, it is imperative to control for unobserved prices and demand shocks. I develop an empirical model that combines a demand system with a production function to generate estimates of productivity. I rely on my framework to identify the productivity effects from reduced trade protection in the Belgian textile market. This trade liberalization provides me with observed demand shifters that are used to separate out the associated price, scale, and productivity effects. Using a matched plant–product level data set and detailed quota data, I find that correcting for unobserved prices leads to substantially lower productivity gains. More specifically, abolishing all quota protections increases firm‐level productivity by only 2 percent as opposed to 8 percent when relying on standard measures of productivity. My results beg for a serious reevaluation of a long list of empirical studies that document productivity responses to major industry shocks and, in particular, to opening up to trade. My findings imply the need to study the impact of changes in the operating environment on productivity together with market power and prices in one integrated framework. The suggested method and identification strategy are quite general and can be applied whenever it is important to distinguish between revenue productivity and physical productivity.

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Supplemental Material

Supplement to "Product differentiation, multi-product firms and estimating the impact of trade liberalization on productivity"

The appendix contains more information on the data and presents more details on the estimation of the multi-product case.  Finally, the conditions of invertibility of the input demand and investment functions are presented.

Supplement to "Product differentiation, multi-product firms and estimating the impact of trade liberalization on productivity"

A zip file containing replication files for the manuscript.