Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices -- and therefore over which producers have some direct control, at least in theory -- as well as from producers' external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)

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What Determines Productivity

A rapidly growing body of research applies panel methods to examine how temperature, precipitation, and windstorms influence economic outcomes. These studies focus on changes in weather realizations over time within a given spatial area and demonstrate impacts on agricultural output, industrial output, labor productivity, energy demand, health, conflict, and economic growth, among other outcomes. By harnessing exogenous variation over time within a given spatial unit, these studies help credibly identify (i) the breadth of channels linking weather and the economy, (ii) heterogeneous treatment effects across different types of locations, and (iii) nonlinear effects of weather variables. This paper reviews the new literature with two purposes. First, we summarize recent work, providing a guide to its methodologies, datasets, and findings. Second, we consider applications of the new literature, including insights for the "damage function" within models that seek to assess the potential economic effects of future climate change. ( JEL C51, D72, O13, Q51, Q54)

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What Do We Learn from the Weather? The New Climate-Economy Literature

This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.

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Fluctuations in Uncertainty

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Annual Energy Outlook 2008 With Projections to 2030

This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms’ investment problem, I find that: (i) the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory, (ii) the cost of failing to respond to volatility shocks is economically significant, and (iii) implied volatility data derived from futures options prices yields a better fit to firms’ investment behavior than backward-looking volatility measures such as GARCH. (JEL C58, D92, G13, G31, L71, Q31) The real options literature, beginning with Marschak (1949) and Arrow (1968) and developed in Bernanke (1983), Pindyck (1991), and Dixit and Pindyck (1994), explains how firms should make decisions about investments that involve sunk costs. Real options theory views such investments as options in that, at any point in time, a firm may choose to either invest immediately or delay and observe the evolution of the investment’s payoff. A key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible, even holding the expected future return constant at its present level. Thus, in the presence of irreversibility and uncertainty, a naive investment timing rule—proceed with an investment if its expected benefit even slightly exceeds its cost—is suboptimal because it does not account for the value of continuing to hold the option. Instead, firms should delay irreversible investments until a significant gap develops between the investments’ expected benefits and costs. Moreover, as uncertainty increases, real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen. While real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments, it is not empirically well-known

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The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling

This paper examines the effects of U.S. gasoline content regulations on groundlevel ozone pollution. These regulations are costly and have been shown to fragment gasoline markets and raise prices paid by consumers. We provide the first comprehensive empirical estimates of the regulations’ air quality benefits. We exploit the fact that gasoline regulations vary by time and place of introduction, using both difference-in-difference and regression discontinuity designs. We show that federal regulations targeting the emissions of volatile organic compounds (VOCs), one of the two main precursors to ozone, do not substantially improve air quality. This outcome is driven by the response of refiners to the regulation: minimizing the cost of abatement involves removing a type of VOC from gasoline that is not an important determinant of ozone pollution. In California, however, we show that precisely targeted regulations requiring the removal of VOCs particularly prone to forming ozone caused a significant improvement in air quality.

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Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality †

A full understanding of how gasoline prices affect consumer behavior frequently requires information on how consumers forecast future gasoline prices. We provide the first evidence on the nature of these forecasts by analyzing two decades of data on gasoline price expectations from the Michigan Survey of Consumers. We find that average consumer beliefs are typically indistinguishable from a no-change forecast, justifying an assumption commonly made in the literature on consumer valuation of energy efficiency. We also provide evidence on circumstances in which consumer forecasts are likely to deviate from no-change and on significant cross-consumer forecast heterogeneity.

What Do Consumers Believe About Future Gasoline Prices

We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs and explains why production is typically constrained. It also rationalizes regional production peaks and observed patterns of price expectations following demand shocks.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2537827_code1108470.pdf?abstractid=2537827&mirid=1

Hotelling Under Pressure

Production in many industries, such as construction and heavy manufacturing, relies on inputs from both lead firms and contractors. These firms’ joint productivity often hinges on their ability to share information and coordinate activities, suggesting that they have strong incentives to learn about each other’s personnel, procedures, and expertise. This learning differs from standard learning-by-doing in that it is relationship-specific: its benefits are not appropriable outside the relationship in which the learning takes place. In this paper, I empirically examine the importance of relationship-specific learning using high-frequency data from oil and gas drilling. I find that the joint productivity of a lead firm and its drilling contractor is enhanced significantly as they accumulate experience working together. This result is robust to other relationship specificities. I also find that firms appear to recognize the benefits of joint experience: controlling for other specificities, lead firms are more likely to work with contractors with which they have substantial prior experience than those with which they have worked relatively little.

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Ryan Kellogg

Papers

The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling

Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality †

What Do Consumers Believe About Future Gasoline Prices

Hotelling Under Pressure

Learning by Drilling: Interfirm Learning and Relationship Persistence in the Texas Oilpatch