Project Management

Productivity, Welfare And Reallocation: Theory And Firm-Level Evidence

Download Now Date Added: Dec 2009
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The authors prove that in a closed economy without distortionary taxation, the welfare of a representative consumer is summarized to a first order by the current and expected future values of the Solow productivity residual in level and by the initial endowment of capital. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare and makes it possible to calculate the contributions of disaggregated units to aggregate welfare using readily available TFP data.