Measuring Actual TFP Growth : Stripping Away Omitted Price Bias and Demand Shocks

We address two important sources of bias that remain unaccounted for in most analyses of firm-level productivity and trade policy, i.e., omitted output price bias and demand shocks. Using firm-level data containing product-level price and physical output measures, we avoid the omitted output price bias typically encountered when using sectoral deflators. Besides being a primary determinant of firm survival, our precise controls for demand shocks also help account for quality differences between firms. We then test the methodology developed by De Loecker (2011) for use on firm revenue data and find that its accuracy is dependent on the precision of the price deflator. Results from Pakistan suggest that the impact of a 10% reduction in tariffs on firm-level productivity falls from 0.81% to 0.23%. The net impact of trade liberalization has been a mere 2.2%, with the biggest gains in the least protected segments