The Role of Demand-Side Factors in Estimating Productivity with Applications to International Trade.

Economists as well as policy makers are highly interested in understanding how firms turn inputs into outputs. Productivity, which measures the efficiency of this conversion directly affects the performance of firms and countries. Over the last decades, our knowledge of productivity drivers has increased substantially. An important caveat of the findings is that due to data and methodological restrictions, measured productivity typically mixes demand effects with physical productivity effects while the welfare implications of both effects could be different. The project will remedy this situation. In a first phase measured productivity will be disentangled into demand and physical productivity factors. To this end we will make use of an unusually rich dataset containing firm level prices. In a second phase, we will evaluate existing methods to estimate productivity taking into account the demand side effects without observing firm level prices. Finally, we will carry out two applications in the field of international trade where the distinction between the demand and production side is expected to be highly important. First, we analyze the impact of antidumping measures on both physical productivity and demand of domestic firms. Second, we investigate the importance of demand factors in the observed productivity differences between internationally active and purely domestic firms .