Dynamic Olley-Pakes productivity decomposition with entry and exit

Abstract

We propose an extension of the Olley and Pakes () productivity decomposition that accounts for the contributions of surviving, entering, and exiting firms to aggregate productivity changes. We argue that the other decompositions that break down aggregate productivity changes into similar components introduce some biases in the measurement of the contributions of entry and exit. We apply our proposed decomposition to Slovenian manufacturing data and contrast our results with those of other decompositions. We find that, over a five-year period, the measurement bias associated with entry and exit is substantial, accounting for up to 10 percentage points of aggregate productivity growth.