Productivity, markups, and trade liberalization: evidence from Mexican manufacturing industries

In order to evaluate the eects of any policy or answer economic relevant questions it is of primary importance to accurately quantify the variables and the parameters that may be involved with the policy or the questions. Since production functions are a fundamental components of all economics, in most of the cases answering those questions requires to estimate production function parameters. Nonetheless, production function estimation is challenging since optimal input choices are correlated with rm-specic unobserved productivity shocks. In this contribution I apply a structural framework for estimating production function coecients explicitly controlling for productivity through an observable proxy (investment or intermediate inputs) using a rich panel dataset of Mexican manufacturing rms between 1984 and 1990. I further derive rm-level markup estimates and use these estimates to evaluate the impact of the dramatic trade liberalization that took place in Mexico during the sample period on the protability of domestic rms and exporters. My ndings emphasize the importance of obtaining consistent estimates in order to correctly assess dierences in technologies, productivity, and market power among the Mexican rms.