Comparing productivity when products and inputs differ in quality: China manufacturing growth 1998-2013

Abstract

We measure and compare productivity when products and inputs are heterogeneous in quality, analyzing productivity growth in China manufacturing 1998-2013. Growth was mostly based on the introduction and development of new products, in particular by entrants. Not controlling for quality, measured productivity understimates productivity by the amount of the quality dimension of production, and overstimates it by the effect of the higher quality of the inputs. To control for input quality we specify the inputs of the production function in the form of standardized quantities. To identify the direct effect of quality on production and productivity we use the demand for the product (set of products) of the firm, assuming that the firm sets optimally the unobserved level of quality. Not all demand heterogeneity, however, can be assumed to be due to quality.