Productivity change, capacity utilization, and the sources of efficiency growth (Q1085769)

In the conventional framework for measuring multifactor productivity the total growth rate of real output is resolved into two components - one associated with the growth rates of factor inputs and the other, a residual identified with changes in efficiency. A crucial limitation of this approach is that all inputs are assumed freely adjustable to input- price variations. \textit{E. R. Berndt} and \textit{M. A. Fuss} [''Productivity measurement using capital asset valuation to adjust for variations in utilization'', NBER working paper No.895 (1982)] explore the consequences for multi-factor productivity measurement of relaxing this assumption and allowing some inputs, such as capital, to be quasi-fixed. They show, that with quasi-fixed inputs, real output growth can be resolved into three components, the additional component (apart from the two already mentioned) being based on changes in the utilization of the quasi-fixed factors. A fundamental duality result in production theory, states that short-run real average costs decrease at a rate given by the growth of the Hicksian efficiency parameter. In the current paper, this duality result is extended in the Berndt-Fuss context. Two major results emerge as a consequence. Firstly, the growth rate of real short-run average costs is shown to be the sum of two terms - the growth rate of multi-factor productivity and the Berndt-Fuss capacity utilization index. Secondly, the index itself turns out to be the difference between the true multi- factor productivity residual and the 'false' residual (i.e. the residual obtained by erroneously assuming the economy to be in long-run equilibrium). An empirically attractive feature of the method is that the requisite decompositions can be obtained using price and quantity data alone without recourse to the econometric estimation of the underlying production function.