Dynamic Productivity Decomposition with Allocative Efficiency
We propose a novel approach to decomposing aggregate productivity growth into changes in technical efficiency, allocative efficiency, and variety of goods as well as relative efficiency of entrants and exiters. We measure technical efficiency by the aggregate production possibility frontier and allocative efficiency by the distance from the frontier. Applying our approach to establishment- and firm-level datasets from Japan, we find that the allocative efficiency among survivors declined during the banking crisis period, while the technical efficiency declined during the Global Financial Crisis period. Furthermore, we find that both entrants and exiters were likely to be more efficient than survivors.
Growth in aggregate productivity is key to economic growth in both developing and developed economies. Past studies have proposed various methods of analysis to gain further insight into its driving forces. These include aggregating producer-level productivity to economy-wide productivity, and decomposing changes in aggregate productivity. This decomposition consists of changes in technology, allocation of resources across producers, and the relative productivity of entrants and survivors. However, as far as we know, no preceding study decomposes aggregate productivity into technical efficiency in terms of the aggregate production possibility frontier, and allocative efficiency in terms of distance from the frontier, although this decomposition is straightforward from a microeconomic view.