Productivity Dispersion and Measurement Error

Several reasons have been put forward to explain the high dispersion of productivity across establishments: quality of management, different input usage and market distortions, to name but a few. Although it is acknowledged that a sizable portion of productivity dispersion may also be due to measure...

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Bibliographic Details
Published in:The Review of income and wealth 2020-12, Vol.66 (4), p.985-996
Main Authors: von Brasch, Thomas, Iancu, Diana‐Cristina, Skjerpen, Terje
Format: Article
Language:English
Subjects:
Economic theory
establishment performance
Food
labor productivity
Measurement errors
Productivity
productivity dispersion
Productivity measurement
Quality
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Summary:Several reasons have been put forward to explain the high dispersion of productivity across establishments: quality of management, different input usage and market distortions, to name but a few. Although it is acknowledged that a sizable portion of productivity dispersion may also be due to measurement error, little research has been devoted to identifying how much they contribute. We outline a novel procedure for identifying the role of measurement error in explaining the empirical dispersion of productivity across establishments. The starting point of our framework is the errors‐in‐variable model consisting of a measurement equation and a structural equation for latent productivity. We estimate the variance of the measurement error and subsequently estimate the variance of the latent productivity variable, which is not contaminated by measurement error. Using Norwegian data on the manufacture of food products, we find that about one percent of the measured dispersion stems from measurement error.
ISSN:0034-6586
1475-4991
DOI:10.1111/roiw.12455