Abstract

The correlation between productivity and competition is an oft-observed but ill-understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of "managerial slack." Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, I model the establishment exit decision to construct a semi-parametric selection correction and quantify the empirical significance of treatment and selection. Second, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. Finally, I look for evidence of a correlation between competition and reallocation using a standard decomposition approach at the market level. I find no evidence greater selection or reallocation in more competitive markets; instead, my results suggest that measured productivity responds directly to competition.

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Citation

Backus, Matthew. "Why Is Productivity Correlated with Competition?" Columbia Business School, August 19, 2014.

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