All Rights Reserved
AccessEcon LLC 2006, 2008.
Powered by MinhViet JSC

Sergio DeSouza
''Levinsohn and Petrin's (2003) Methodology Works under Monopolistic Competition''
( 2006, Vol. 12 No.6 )
Markups, returns to scale and productivity can be uncovered from regressing output on inputs. However, econometric identification of theses parameters may be problematic due the simultaneity problem. A common solution is the IV method. However, usual instruments are only weakly correlated to the explanatory variables. Levinsohn and Petrin (2003) propose using a commonly observable variable (intermediate input) to control for unobserved productivity. Their methodology is based on the following key result: under the assumption of perfect competition, the intermediate input's demand function is a monotonic function of productivity. However, firms in most industries enjoy some degree of market power such that perfect competition may not be a desirable assumption for most empirical studies. This paper contributes to the literature by showing the monotonicity condition holds under monopolistic competition.
Keywords: Imperfect Competition
JEL: L1 - Market Structure, Firm Strategy, and Market Performance: General
D2 - Production and Organizations: General
Manuscript Received : Jul 31 2006 Manuscript Accepted : Aug 09 2006

  This abstract has been downloaded 2012 times                The Full PDF of this paper has been downloaded 153796 times