|
| |
| 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 |
|
