Product Differentiation, Multi-Product Firms and Estimating the Impact of Trade Liberalization on Productivity, Princeton mimeo

In this paper I propose a methodology to estimate (total factor) productivity in an environment of product differentiation and multi-product firms. In addition to correcting for the simultaneity bias in the estimation of production functions, I control for the omitted price bias as documented by Klette and Griliches (1996). By aggregating demand and production from product space into firm space, I am able to use plant-level data to estimate productivity. The productivity estimates are corrected for demand shocks and as by-products I recover the elasticity of demand and implied mark-ups. I apply this methodology to the Belgian textile industry using a dataset where I have matched firm-level with product-level information. The resulting production coefficients and productivity estimates change considerably once taking into account the demand variation and the product mix. Finally, I analyze the effects of trade liberalization in the Belgian textile industry. While I find significant productivity gains from trade liberalization, the estimated effects are approximately half of those obtained with standard techniques