Fed paper quantifies productivity and quality in multi-product firms
A new Federal Reserve International Finance Discussion Paper introduces a method for estimating productivity and quality at the firm-product level. The research indicates product-specific technological improvements generate substantial welfare gains.
Unlocking Firm-Product Dynamics
The paper introduces a novel method for estimating productivity and quality at the firm-product level, utilizing a transformation function framework.
This approach avoids imputing firm-product input shares and imposing productivity evolution processes, making it scalable to numerous products.
It can also address the bias caused by unobserved heterogeneous intermediate input prices, offering a robust and flexible tool for economic analysis in complex multi-product firm environments.
The authors detail the theoretical underpinnings and empirical advantages of their new estimation technique.
Spillovers Amplify Welfare Gains
The method is applied to a set of Mexican manufacturing industries to examine the roles of across-firm and within-firm technological spillovers, accounting for the trade-off between productivity and quality.
The quantitative analysis shows that an exogenous, product-specific technological improvement generates substantial gains in welfare.
These gains are significantly amplified by both within-firm spillovers (approximately 17 percent) and across-firm spillovers (approximately 5 percent).
Moreover, within-firm resource reallocation toward the most productive products accounts for a substantial 60 percent of the resulting firm-level productivity gains, highlighting the importance of internal firm dynamics.