On Productivity Dispersion and Plant Size: The Role of Market Structure

Available micro-level data suggest that productivity differences across producers are large and persistent even with the narrowest industry definitions. Both supply and demand side frictions contribute to these differences. This paper further analyzes the relationship between productivity dispersion and the producer size. The US Census of Manufactures reveals significant productivity dispersion at each employment level. Moreover, this productivity dispersion falls with employment size within most manufacturing industries. It will be shown that plant-level births and deaths and simple statistical aggregation do not explain this pattern convincingly. This paper introduces a market structure model that uses demand size and market localization as constraining forces to generate a bell-shaped relationship between input size and productivity. The non-monotonicity of the relation suggests that the selection process relies on both productivity and profitability, where low productivity plants are forced out of the market by competition and very productive plants do not hire inputs due to the constrained market. This is a major departure from models where only low productivity plants leave the market and productivity is monotonically increasing in the size of operating plants in equilibrium. In addition, the proposed model predicts significant productivity dispersion at any level of input size and implies that this dispersion should decrease with the size, exactly as is observed in the data. Also in the data I find a bell-shaped relationship between employment and productivity in industries with localized markets but not the industries with more globalized markets. Throughout the paper, a distinction is made between physical and revenue productivities and the theoretical implications of both measures are shown to be qualitatively the same. *Disclaimer: This document reports the results of research and analysis undertaken by the U.S. Census Bureau staff. It has undergone a Census Bureau review more limited in scope than that given to official Census Bureau publications. This document is released to inform interested parties of research and to encourage discussion. This research is a part of the U.S. Census Bureau’s Longitudinal Employer-Household Dynamics Program (LEHD), which is partially supported by the National Science Foundation Grants SES-9978093 and SES-0427889 to Cornell University (Cornell Institute for Social and Economic Research), the National Institute on Aging Grant R01 AG018854-02, and the Alfred P. Sloan Foundation. The views expressed on statistical issues are those of the author and not necessarily those of the U.S. Census Bureau, its program sponsors or data providers. Some or all of the data used in this paper are confidential data from the LEHD Program. The U.S. Census Bureau supports external researchers’ use of these data through the Research Data Centers (see www.ces.census.gov). For other questions regarding the data, please contact Jeremy S. Wu, Program Manager, U.S. Census Bureau, LEHD Program, Room 6H141, 4600 Silver Hill Road, Suitland, MD 20746, USA ([email protected], http://lehd.did.census.gov). You can contact the author by emailing [email protected] * My special thanks to Prof. John Haltiwanger for his invaluable support all along. I am also deeply grateful to Hyowook Chiang for providing me with the data. I would also want to thank the LEHD staff at Census Bureau, Macroeconomic Brownbag seminar participants at the University of Maryland and specially John Shea, Michael Pries, Daniel Vincent, and Ingmar Prucha for their insightful comments and guidance.