Identification Properties for Estimating the Impact of Regulation on Markups and Productivity

This paper addresses several shortcomings in the productivity and markup estimation literature. Using Monte-Carlo simulations, the analysis shows that the methods in Ackerberg, Caves and Frazer (2015) and De Loecker and Warzynski (2012) produce biased estimates of the impact of policy variables on m...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Sampi Bravo,James Robert Ezequiel, Jooste, Charl, Vostroknutova, Ekaterina
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2021
Subjects
Production functions
Productivity
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Summary:This paper addresses several shortcomings in the productivity and markup estimation literature. Using Monte-Carlo simulations, the analysis shows that the methods in Ackerberg, Caves and Frazer (2015) and De Loecker and Warzynski (2012) produce biased estimates of the impact of policy variables on markups and productivity. This bias stems from endogeneity due to the following: (1) the functional form of the production function; (2) the omission of demand shifters; (3) the absence of price information; (4) the violation of the Markov process for productivity; and (5) misspecification when marginal costs are excluded in the estimation. The paper addresses these concerns using a quasi-maximum likelihood approach and a generalized estimator for the production function. It produces unbiased estimates of the impact of regulation on markups and productivity. The paper therefore proposes a work-around solution for the identification problem identified in Bond, Hashemi, Kaplan and Zoch (2020), and an unbiased measure of productivity, by directly accounting for the joint impact of regulation on markups and productivity.