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Productivity Dispersion and Measurement Error
Author(s) -
von Brasch Thomas,
Iancu DianaCristina,
Skjerpen Terje
Publication year - 2020
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12455
Subject(s) - observational error , productivity , variance (accounting) , dispersion (optics) , econometrics , latent variable , variable (mathematics) , errors in variables models , statistics , economics , mathematics , macroeconomics , accounting , mathematical analysis , physics , optics
Several reasons have been put forward to explain the high dispersion of productivity across establishments: quality of management, different input usage and market distortions, to name but a few. Although it is acknowledged that a sizable portion of productivity dispersion may also be due to measurement error, little research has been devoted to identifying how much they contribute. We outline a novel procedure for identifying the role of measurement error in explaining the empirical dispersion of productivity across establishments. The starting point of our framework is the errors‐in‐variable model consisting of a measurement equation and a structural equation for latent productivity. We estimate the variance of the measurement error and subsequently estimate the variance of the latent productivity variable, which is not contaminated by measurement error. Using Norwegian data on the manufacture of food products, we find that about one percent of the measured dispersion stems from measurement error.