A note on the estimation of competition-productivity nexus: a panel quantile approach
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A note on the estimation of competition‑productivity nexus: a panel quantile approach Michael L. Polemis1,2 Received: 8 January 2020 / Revised: 22 March 2020 / Accepted: 26 March 2020 © Associazione Amici di Economia e Politica Industriale 2020
Abstract We study the impact of product market competition on total factor productivity in 462 US manufacturing sectors for the period 1958–2009 through the lens of a panel quantile regression analysis. We confirm that there is a nonmonotonic inverse-U relationship between competition and productivity. We argue that the turning point increases substantially as we move to the higher quantiles of the productivity distribution function. Our findings survive robustness checks under alternative competition measure and panel quantile estimator. Keywords Quantile regression · Competition · Nonlinearities · Manufacturing · US JEL Classification L11 · C23 · C21
1 Introduction The effect of product market competition (PMC) on productivity dates back in the pioneering work of Sir John Hicks (1935) arguing that “the best of all monopoly profits is a quiet life”. Since then several theories have brought to light different arguments. Schumpeter (1943) claims that there is a positive linear relationship between market power and productivity appraising the ability of the monopolies to stimulate productivity and growth, while Arrow (1962) suggests that there is a positive nonmonotonic convex relationship between PMC and productivity pointing out that market power induces firms to protect their status quo, thus discourages them from engaging in developing costly disruptive technologies. Although there is a sizeable literature studying the link between market structure and productivity, no
* Michael L. Polemis [email protected] 1
Department of Economics, University of Piraeus, Piraeus, Greece
2
Hellenic Competition Commission, Athens, Greece
13
Vol.:(0123456789)
Journal of Industrial and Business Economics
clear consensus has been reached by combining prior theoretical predictions with recent empirical results. As several studies argue (see, among others, Aghion et al. 2005; Amable et al. 2016), the leading Industrial Organization models, give rise to the “Schumpeterian effect” implying a negative impact of competition on innovation. This finding is also supported by empirical evidence (Aghion and Howitt 1992; Hashmi 2013). However, many studies give rise to the so called “escape competition effect”. The latter indicates that firms tend to increase the innovation activity when competition increases as a means to improve their profit margin (Bloom et al. 2011; Blundell et al. 1999; Carlin et al. 2004; Correa 2012; Correa and Ornaghi 2014; Gorodnichenko et al. 2010; Nickell 1996; Schmitz 2005; Van Reenen 2011). While economic theory provides mixed predictions about the effect of competition on innovation and productivity, empirical research suggests that such relationship follows an inverse U-shape (see for example Aghion et al. 2005; Van Reenen 2011; Marshall and Parra 20
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