Productivity measurement using capital asset valuation to adjust for variations in utilization

Abstract

Although a great deal of empirical research on productivity measurement has taken place in the last decade, one issue remaining particularly controversial and decisive is the manner by which one adjusts the productivity residual for variations in capital and capacity utilization. In this paper we use the Marshallian framework of a short run production or cost function with certain inputs quasi-fixed to provide a theoretical basis for accounting for variations in utilization. The theoretical model implies that the value of services from stocks of quasi-fixed inputs should be altered rather than their quantity. This represents a departure from previous procedures that have adjusted the quantity of capital services for variations in utilization. In the empirical illustration, we employ Tobin's q to measure the shadow value of capital, and find that for the U.S. manufacturing sector, we can attribute 25% of the traditionally measured decline in productivity growth during 1973-77 to a decline in capacity utilization.