Discussion Paper “Production Function, Market Power and Rent Sharing: Lessons from Hybrid Industrial-Labour Economics” by Jian Tong and Carmine Ornaghi
Abstract:
In this paper, we build a theoretical model of imperfect competition in both product and labour markets, featuring heterogeneous firm productivities, and use it to guide empirical identification of parameters of production and labour supply functions as well as market power indices. Our methodology offers novel treatments to three stringent assumptions of the cost share approach `a la Solow (1957): (1) perfect competition in all markets, (2) constant returns to scale (CRS), and (3) Cobb-Douglas production function. To address (1), we show that the ratio between output elasticities of intermediate and labour inputs can be recovered from a subset consisting of competitive fringe firms. For (2) we provide theoretical and empirical evidence to support the notion of a short-run production function characterised by CRS. For (3), we augment the Cobb-Douglas production function with a correction term that captures the effects of firms’buyer power and workers’ countervailing seller power in labour market. We validate our novel methodology with a panel of UK manufacturing firms, and show that our methodological innovations in (1)-(3) are all relevant in delivering new substantive findings.
Keywords: estimation of production function, multifactor productivity, market power,
countervailing power, markdown, oligopsony, rent sharing, income distribution.
JEL Classification Codes: D21, D33, D43, D6, E24, J2, J3, L4