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Why is Productivity Correlated with Competition?

Author

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  • Matthew Backus

    (Cornell University)

Abstract
The positive correlation between average establishment-level productivity and measures of competitiveness is oft-observed but still controversial, despite its implications for competition policy and its centrality in the debate over the origins of the productivity effect of trade liberalization. This paper considers two competing explanations for the existence of the correlation: a causal relationship between competition and productivity, historically known as "X-inefficiency", and a market-level dynamic selection story that has gained ground in the trade literature. This paper demonstrates that the two effects are econometrically separable. Two empirical approaches are developed: a regression of quantiles and a selection correction procedure derived from a model of Markov-perfect industry dynamics. Both methods are applied to the ready- mix concrete industry, and results suggest that the correlation is almost exclusively attributable to X-inefficiency.

Suggested Citation

  • Matthew Backus, 2014. "Why is Productivity Correlated with Competition?," 2014 Meeting Papers 726, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:726
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    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

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