Why is Productivity Correlated with Competition?∗

The correlation between productivity and competition is an oft–observed but ill– understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of “managerial slack.” Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, I model the establishment exit decision to construct a semi-parametric selection correction and quantify the empirical significance of treatment and selection. Second, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. Finally, I look for evidence of a correlation between competition and reallocation using a standard decomposition approach at the market level. I find no evidence greater selection or reallocation in more competitive markets; instead, my results suggest that measured productivity responds directly to competition. ∗This is a revised version of the first chapter of my dissertation; the original version is dated November 11, 2011. I am grateful to my advisors Daniel Ackerberg, Jeremy Fox, Francine Lafontaine, Natalia Lazzati, and Scott Page for their encouragement and guidance. Thanks also to Jim Adams, Allan Collard-Wexler, Ying Fan, John Haltiwanger, Panle Jia Barwick, Kai-Uwe Kühn, Shawn Klimek, Jagadeesh Sivadasan, Chad Syverson, and seminar participants at Bocconi, Cornell, Duke Fuqua, EARIE 2014, Econometric Society North American and European Summer Meetings 2014, eBay Research Labs, FTC, HBS, IIOC 2014, Iowa, Michigan, SED 2014, Stanford GSB, Temple Fox, Toulouse, University of Buffalo, and Warwick for helpful comments and suggestions. All remaining errors are my own. This paper was written while I was a Special Sworn Status researcher of the US Census Bureau at the University of Michigan Research Data Center. Any opinions and conclusions expressed herein are those of the author and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. †Cornell University and eBay Research Labs. E-mail: [email protected]