Technology Flashcards
Please outline 3 sources of productivity (TFP) growth at the firm level.
Imagine the economy as a vast, bustling city where every business, from tiny startups to massive corporations, is a building. In this city, the goal is to produce as much value as possible, which we can think of as the city’s overall productivity. To boost this productivity, there are three main strategies at play, like different urban development plans:
Within-Company Improvements (Technology Channel):
This is like upgrading the interior of each building. Businesses work on themselves—improving how they manage their teams, how skilled their workers are, adopting new technologies, or coming up with innovative products. It’s about making sure that every tool, machine, and person inside the building works as efficiently and effectively as possible. Imagine installing faster elevators, better computers, or providing better training to the staff within a building. The result is that each business can produce more or better services and goods with the same or fewer resources.
Resource Reallocation (Misallocation Channel):
Imagine looking at the city from above and seeing resources like money, equipment, and people flying across the sky from one building to another. In an ideal city, these resources would always move to the buildings that can use them most effectively—the ones that can turn them into the most value. This strategy is about ensuring the most productive businesses have the resources they need to grow and produce even more. However, sometimes the flow of resources gets blocked or misdirected by various barriers, like bad policies or market failures, preventing the city from reaching its full productivity potential.
Business Turnover (Selection):
This involves the constant construction and demolition of buildings within our city. New buildings (businesses) are constructed because they have fresh, innovative ideas that can produce more value. Meanwhile, older, less efficient buildings (businesses) are torn down to make room. This process is like the city renewing itself, always ensuring that only the most productive buildings take up space. It’s a bit harsh, but it means the city’s overall productivity keeps rising, as newer, better buildings replace older, less efficient ones.
Please describe what is meant by resource misallocation and illustrate how relative
marginal products of capital can be used to identify whether firms of different
employment size are financially constrained.
Resource misallocation refers to distortions in the allocation of inputs (such as capital, land, and labor) across production units of varying sizes.
Hsieh and Olken (2014) – Identifying credit constraints based on differences in marginal products.
Hsieh and Klenow suggest that by examining the gaps in marginal products of capital across firms, we can infer misallocation. If all firms had optimal access to capital, the marginal product of capital would be equal across them because any differences would prompt capital to move to where it’s most productive.
However, if we observe large gaps in the marginal products of capital—meaning, in some firms, an extra dollar generates much more output than in others—it signals that capital isn’t being allocated efficiently. These gaps often point to financial constraints, especially affecting smaller or less established firms. They may have high potential productivity but lack the capital to expand or innovate due to higher barriers to financing compared to larger firms.
In essence, by studying these discrepancies, researchers like Hsieh and Klenow aim to understand how realigning resources (capital and labor) to mirror a scenario with fewer distortions (like the efficient allocation seen in economies like the U.S.) could boost overall productivity and growth.
In their study they have a key conclusion saying: Then extent of misallocation is worse when there is a larger scattering in the different companies marginal products. In more academic words, the negative effect of distortions on aggregate TFP can (partly) be summarized by the variance of log TFPR.
Please explain what increased variance in TFPQ and TFPR, respectively will do to
sector level TFP (assume elasticity of substitution is larger than 2).
If 𝝈 > 2, more variance of A (TFPQ) increases TFP. Why?
* Holding constant distortions, firms with high A have lower marginal cost.
* Since there is a constant markup over marginal cost, they also charge (proportionately) lower prices.
* Hence, their output will be higher, and they get more weight in the calculation of TFP than the firms with
lower A.
* The higher the elasticity of substitution, the larger will be the output response to price differences, and hence, the higher TFP for a given distribution of A.
If 𝝈 > 2, more variance of TFPR decreases TFP. Why?
* Holding A (TFPQ) constant, a firm with higher TFPR has higher marginal cost and, hence, (proportionately)
higher prices.
* This will induce the firm to produce less than in the absence of distortions.
* If TFPR and TFPQ are positively correlated, it means that firms that are very efficient at producing goods (high TFPQ) don’t grow as large as they should. This happens because of market distortions, which prevent these efficient firms from expanding to their optimal size. As a result, the overall productivity of the economy (aggregate TFP) suffers because the most productive firms aren’t contributing as much as they could be.
Conclusion: The correlation between TFPR and A (TFPQ) matters.
From the Table, please calculate the relative firm size difference between the 75 percentile and the 25 percentile for the 4 African countries. Moreover, comment on
the magnitude of the correlated distortions.
See the table in review
Husk at lave beregningen ellers vill vi tro at distortion graden i Elfenbenskysten er tættere på niveauet af distortion i Kenya, hvilket det i virkeligheden ikke er
Beregning:
e^(TFPR)
Hvor TFPR (TFPR er målt i log)
Eg. Elfenbenskysten e^(0.88) = 2,4 og Kenya e^(1,99) = 7,3. Hvorfor Kenya har omkring 3 gange mere distortion end Elfenbenskysten.
Reg.Coeff. (correlated distortions):
Jo højere tallet er, jo højere del af profitten går til virksomheder der er uprodoktive, i den forståelse at en produktiv virksomhed ikke laver nogen profit, hvis alle andre virksomheder også er produktive. Hvis reg.coeff er lig nul, så ville der i teorien være fuldkommen konkurrence, hvorfor ingen profit.
Eg. Elfenbenskysten reg.coeff er 0,42 og Kenyas er 0,52, hvilket vil sige at Kenya har flere uprodoktive virksomheder.
Please outline the assumptions leading to marginal products of capital (MPK) being
proportional to average product of capital (APK).
We do not directly measure the marginal return to inputs, but we can
measure the average return to inputs easily.
Approach valid if following assumption is true:
* Revenue is generated by a Cobb-Douglas production function
* Factor-intensities and markups are constant
* Fixed costs are zero (constant)
THEN the marginal return of each input is proportional to its average
product.
Please describe what is meant by the “missing middle” and outline two different ways of testing the hypothesis.
“The idea of the missing middle is that there are a large number of small firms, some large firms, but very few medium-sized firms”, argue Chang-Tai Hsieh and Benjamin A. Olken in there paper.
The “missing middle” phenomenon refers to the observation that in many developing economies, particularly in Sub-Saharan Africa, there is a skewed distribution of firms by size: there are many small and micro firms and a few very large firms, but a gap exists where we would expect to find mid-sized firms. This gap suggests that firms are either not growing as expected or that there is a barrier preventing small firms from becoming medium-sized or large.
TEST´s
Way of thinking - We would like marginal returns to capital to as small as possible. Because this means, that all ressources is divided best as possible, so the economy doesn´t face any misallocation of capital due to constraints.
Hsieh and Olken (JEP, 2014)
- Provides a indirect test of
1) Small firms constrained or do not benefit from industrial policy interventions (the institutional environment discriminate against smaller firms and favor larger firms).
- “C” test: Marginal returns should be higher in smaller/constrained firms compared to larger/unconstrained ones.
2) “Dual economy theory”. Large firms are subject to constraints and regulations that small firms are able to evade. Furthermore do larger firm have to pay very high fixed costs for modern technology, which smaller firm can’t afford.
- “D” test: Marginal returns will be lower in smaller/unconstrained firms compared to their larger/constrained counterparts.
Findings: Average returns lower in small firms than in larger firms (both firms are constrained?). This is inconsistent with the view that the observed high returns to capital in smaller firms is due to relatively larger capital constraints upon them.
Rand (various papers)
- Surveys: Direct test of credit constraints - medium firms are relatively more constrained than smaller firms (Rand, 2007)
Understand TFP, TFPQ (A) and TFPR (PA).
TFP can be broken down to TFPQ denote physical productivity (A) and TFPR, which denote revenue productivity.
In simpler terms, TFPR is a measure that shows how well firms turn their costs into revenues, adjusted for the importance of each cost. Differences in TFPR among firms suggest that some firms make more money than others for the same costs, influenced by market conditions. When these differences are large, it often means resources aren’t being used efficiently across firms, signaling room for improvement in how resources are distributed in the economy.
Please define and explain two obstacles to international transfer of technology.
The obstacles are discussed in Weil, Section 8.4.
a) Appropriate technology: Technology is created/developed in the rich countries—hence it is
appropriate for the existing rich country production mode and level, it is not necessarily
appropriate for the poor country production mode and level (capital-bias, skill-bias)
b) Tacit knowledge: Use of new technology requires both codified knowledge (blueprints) and
often tacit (implicit, unstated) knowledge. Rich countries can only transfer the codified
knowledge
Illustrate how productivity can be further decomposed into technology and efficiency and
consider Table 5 from Jerzmanowski (2007), given below, in which Jerzmanowski uses the
steady-state type development accounting to decompose the cross-country variation in (log) output per worker. Please explain the results given the Table.
se table in review
The level of productivity (A) can be thought of as being composed of technology
(T) and efficiency (E), such that
A = T x E
Jerzmanowski uses a non-parametric analysis coupled with the standard Cobb-Douglas
production function to compute levels of technology (T) and levels of efficiency (E) relative to
USA. Subsequently, he applies the steady state type development accounting decomposition to
compute the relative importance of accumulated factors (physical capital and human capital),
technology and efficiency. Results of the variance decomposition for the three years 1960, 1985
and 1995 are given in the table. The table shows that in 1995 69 percent of the cross-country
variance in (log) output is accounted for by variation in productivity. This fraction is
subsequently split into 43 percent accounted for by variation in efficiency and 26 percent due to
technology. The fraction of the variation due to efficiency has been increasing over time, while
the fraction due to technology has been roughly constant and the fraction due to factors of
production has decreased. The results suggest that both inefficiency and appropriate technology
theories appear to be relevant for understanding income differences. However, the
decomposition also shows that inefficiency appears to be a more important source of income
differences and that its importance has increased since 1960.
Please describe what is meant by resource misallocation and illustrate how relative marginal products
of capital can be used to identify whether firms of different employment size are financially
constrained.
The question relates to Lecture 9 (4 April) and review question 2 on 11 April.
The perfect answer will
refer to both the description in Hsieh and Klenow (2009) and Hsieh and Olken (2014) and will refer to
the three sources of productivity (TFP) growth at the firm level:
a. Within component (technology channel) accounting for the productivity growth within
firms. It depends on changes in the efficiency and intensity with which inputs are used in
production owing to increased firm capabilities (including improved managerial skills, labor
skills, innovation, and technology adoption capacity).
b. Between component (misallocation channel) which reflects the role of factor reallocation
across firms in aggregate productivity growth. Increases in the “between” component
imply that the most-productive firms would command the most resources—thus rendering
the largest output and productivity gains. However, multiple distortions may limit the
productivity gains arising from this component.
c. Selection, accounting for the gains arising from the entry of high-productivity firms (relative
to the industry average) and the exit of low-productivity firms (relative to the industry
average). It captures the aggregate effect of firm churning (or turnover) on productivity
growth (creative destruction processes).
The good answer will thereafter focus on the between component/resource misallocation referring to
distortions in the allocation of inputs (such as capital, land, and labor) across production units of
varying sizes, and show how Hsieh and Klenow (2009) infer misallocation from measured gaps in
marginal products.
The excellent answer will thereafter mention under which conditions average
returns to capital (instead of marginal returns) can be used to evaluate financing constraints across
different firm types. If we do not directly measure the marginal return to inputs, but only have average
returns to inputs then the Hsieh and Klenow (2009) approach is still valid if: (i) Revenue is generated by
a Cobb-Douglas production function, (ii) Factor-intensities and markups are constant and (iii) Fixed
costs are zero (constant).
Productivity is often considered to reflect technology and efficiency. Please give a summary of the
reasons why efficiency may be lower in developing countries than in developed countries.
This question is related to Weil ch. 10.
Types of inefficiencies include:
* Unproductive Activities. These activities include rent seeking through different types of
regulation that protect certain businesses or sectors, but lower overall welfare. They also include
nonproductive spending such as spending on security and avoidance of e.g. tax payments.
* Idle resources. This include labor unemployment or underemployment as well un- or
underemployed capital. Idle resources can also take the form of some workers being paid to
work even though they are in fact not working. This can be the result of e.g. government
regulation or of bloated state-owned enterprises.
* Misallocation of factors. If the marginal product of production inputs are not equalized across
sectors, a reallocation of input can increase aggregate output (also called allocative efficiency).
There can be several reasons for why factors may be misallocated, including barriers to mobility,
lack of firm dynamics, misallocation of finance and monopoly power.
* Technology blocking. This occurs when a technology could feasibly be used – but is not used
because someone prevents its use. This is often done in order to gain a dominant market
position (i.e. monopoly power) and extract monopoly rents.
