The Sensitivity of Productivity Growth Measures to Alternative Structural and Behavioral Assumptions: An Application to Electric Utilities 1951–1984

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Abstract
This article examines the sensitivity of three alternative multifactor productivity growth estimates for the electric-utility industry during the 1951–1984 period. The results indicate that multifactor productivity growth estimates are quite sensitive to the relaxation of various structural and behavioral assumptions. First, a benchmark measure is constructed along the lines suggested by Solow (1957). This “residual” approach produces estimates that suggest a substantial decline in firm-level productivity growth after the mid-1960s. Prior to obtaining the second and third estimates, empirical tests of the structural and behavioral assumptions underlying a firm's operation are conducted. First, the structural assumption of constant returns to scale is rejected, and the resulting long-run scale-adjusted multifactor productivity growth estimates are found to be consistently less than the residual estimates. Second, the behavioral assumption of long-run equilibrium is rejected. Comparing the long-run scale-adjusted estimates to scale-adjusted short-run multifactor productivity growth estimates reveals substantial differences.