Does Product Differentiation Reduce the Productivity Dispersion Caused by Uncertainty?

Author Name HOSONO Kaoru (Faculty Fellow, RIETI) / TAKIZAWA Miho (Gakushuin University) / YAMANOUCHI Kenta (Kagawa University)
Creation Date/NO. May 2017 17-E-071
Research Project Microeconometric Analysis of Firm Growth
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First draft: May 2017
Revised: March 2022


Uncertainty affects investment that involves adjustment costs or time-to-build, resulting in dispersion in marginal revenue productivity of capital (MRPK) and consequently in aggregate total factor productivity (TFP). This paper sheds new light on this relationship from the perspective of product differentiation. Using a simple dynamic model and a large panel dataset of manufacturing plants in Japan, we find that while industries with greater time-series volatility in revenue-based productivity (TFPR) have greater cross-sectional dispersion of MRPK, such an impact is stronger for the industries of less differentiated goods. We also obtain supporting evidence that plant-level investment decreases more in response to the volatility in TFPR in the industries of less differentiated goods. Based on the structural estimation result, we find that the effects of the volatility in TFPR on the aggregate TFP are economically sizable and much larger for the industries of less differentiated goods.