Products and productivity

When firms make decisions about which product to manufacture at a more disaggregated level than observed in the data, measured firm productivity reflects both characteristics of the firm and attributes of the products that are non-randomly chosen by the firm. This paper develops a model of industry equilibrium in which firms endogenously sort across products and characterizes the resulting bias in measured firm and aggregate productivity. Calibrating the model's parameters, we show that endogenous product selection can have quantitatively important effects on measured firm and aggregate productivity and their response to changes in parameter values