Endogenous productivity and unobserved prices

Abstract

We discuss ways to apply the model for endogenous productivity when there are no firm-level output price indices available, a limitation of many data bases. Including the demand of the firm in the estimation allows us to obtain a "composite" of productivity, demand elasticity, and demand heterogeneity. This unobservable, often called "revenue productivity", is the estimate of productivity used by most scholarly studies. We find that this composite does not behave as productivity and, in particular, neither is greater for firms that perform R&D nor its distribution shows stochastic dominance. Its persistence and returns also give different results. Our findings highlight that results based on revenue productivity can be highly misleading about the returns of firm investments.