Identifying Demand Shocks From Production Data

Abstract

Standard productivity estimates contain a mixture of cost efficiency and demand conditions. I propose a method to identify the distribution of the demand shock using production data. Identification does not depend on functional form restrictions. It is also robust to dynamic demand considerations and flexible labor. In the parametric case, the ratio of intermediate inputs to the wage bill (input ratio) contains information about the magnitude of the demand shock. The method is tested using data from Spain that contains information on prices and demand conditions. Finally, we generate Monte Carlo simulations to evaluate the method’s performance and sensitivity. Supplementary materials for this article are available online.

KEY WORDS:

• Demand
• Identification
• Input choices
• Production
• Productivity.

Acknowledgments

The author thanks Steve Bond, Yossi Spiegel, and seminar participants in Alicante, Tilburg, ESEM2013, and EARIE2013 for useful comments and suggestions.

Additional information

Funding

Financial support by FCT (Fundação para a Ciência e a Tecnologia), Portugal, is gratefully acknowledged. This article is part of the Strategic Project UID/ECO/00124/2013, and it is also financed by POR Lisboa under the project LISBOA-01-0145-FEDER-007722.