An Application of the M elitz Model to C hinese Firms

When the M elitz model is implemented in practice, the industrial productivity distribution is often assumed to be of P areto form. In this case, a fundamental relationship κ  >  σ  − 1 must hold to guarantee the convergence of the industrial average productivity, where κ is the concentration degree of the industrial productivity P areto distribution and σ is the substitution elasticity across varieties in the industry. This paper estimates the concentration degrees of the P areto distribution in industrial productivity and industrial substitution elasticities using firm‐level data of 40 C hinese manufacturing industries between 1998 and 2007. However, the paper shows that the above fundamental assumption κ  >  σ  − 1 does not hold for nearly all the industries for C hinese firm‐level data. An explanation is proposed as a result of the distorted firm size and productivity for C hinese characteristics.