Market Power, Input Costs, and Technology

The research group deals with the empirical analysis of the dynamics and determinants of economic development. Thereby, we recognize that these are individual heterogeneous firms with their specific capabilities to innovate and to efficiently allocate scarce resources that shape patterns at higher level of aggregation (e.g. cause structural change). While following a micro-level approach we aim at adding to the understanding of the actual mechanisms and dynamics in the development of economies as well as for the development of policy instruments. For instance, one of the current research projects deals with the effect of import competition on the productivity and innovating behaviour of firms as well as on the dynamic in and of industries

The research group works closely together with CompNet.

Research Cluster
Productivity and Institutions

Your contact

Dr Matthias Mertens
Dr Matthias Mertens
Mitglied - Department Structural Change and Productivity
Send Message +49 345 7753-707 Personal page


09.2016 ‐

The Competitiveness Research Network (CompNet)

Funding institutions: European Central Bank (ECB), European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), Tinbergen Institute, European Commission.

The Competitiveness Research Network (CompNet) provides a forum for high level research and policy analysis in the areas of competitiveness and productivity. Its main activities include the regular updating of its micro-based competitiveness database for European countries, unprecedented in terms of coverage and cross-country comparability.

Professor Reint E. Gropp, PhD

Refereed Publications


Import Competition and Firm Productivity: Evidence from German Manufacturing

Richard Bräuer Matthias Mertens Viktor Slavtchev

in: World Economy, forthcoming


Abstract We study how different types of import competition affect firm productivity using firm-product data from German manufacturing (2000-2014). Competition from high-income countries causes affected domestic firms to increase their productivity and lower their prices. Oppositely, import competition from low-wage countries does not lead to firm productivity gains. Instead, domestic firms' sales and input usage decline. Our findings confirm the intuition of ladder models that the effect of competition depends on the "closeness" of competitors. They are in line with widespread X-inefficiencies throughout the economy, which firms reduce in response to competition from high-income countries.

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Paying Outsourced Labor: Direct Evidence from Linked Temp Agency-Worker-Client Data

Andres Drenik Simon Jäger Pascuel Plotkin Benjamin Schoefer

in: Review of Economics and Statistics, forthcoming


We estimate how much firms differentiate pay premia between regular and outsourced workers in temp agency work arrangements. We leverage unique Argentinian administrative data that feature links between user firms (the workplaces where temp workers perform their labor) and temp agencies (their formal employers). We estimate that a high-wage user firm that pays a regular worker a 10% premium pays a temp worker on average only a 4.9% premium, compared to what these workers would earn in a low-wage user firm in their respective work arrangements—the midpoint between the benchmarks for insiders (one) and the competitive spot-labor market (zero).

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Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations

Simon Jäger Benjamin Schoefer Josef Zweimüller

in: Review of Economic Studies, forthcoming


We present a test of Coasean theories of efficient separations. We study a cohort of jobs from the introduction through the repeal of a large age- and region-specific unemployment benefit extension in Austria. In the treatment group, 18.5% fewer jobs survive the program period. According to the Coasean view, the destroyed marginal jobs had low joint surplus. Hence, after the repeal, the treatment survivors should be more resilient than the ineligible control group survivors. Strikingly, the two groups instead exhibit identical post-repeal separation behavior. We provide, and find suggestive evidence consistent with, an alternative model in which wage rigidity drives the inefficient separation dynamics.

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European Firm Concentration and Aggregate Productivity

Tommaso Bighelli Filippo di Mauro Marc Melitz Matthias Mertens

in: Journal of the European Economic Association, No. 2, 2023


This paper derives a European Herfindahl–Hirschman concentration index from 15 micro-aggregated country datasets. In the last decade, European concentration rose due to a reallocation of economic activity toward large and concentrated industries. Over the same period, productivity gains from an increasing allocative efficiency of the European market accounted for 50% of European productivity growth while markups stayed constant. Using country-industry variation, we show that changes in concentration are positively associated with changes in productivity and allocative efficiency. This holds across most sectors and countries and supports the notion that rising concentration in Europe reflects a more efficient market environment rather than weak competition and rising market power.

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The East-West German Gap in Revenue Productivity: Just a Tale of Output Prices?

Matthias Mertens Steffen Müller

in: Journal of Comparative Economics, No. 3, 2022


East German manufacturers’ revenue productivity is substantially below West German levels, even three decades after German unification. Using firm-product-level data with product quantities and prices, we analyze the role of product specialization and show that the prominent “extended work bench hypothesis” cannot explain these sustained productivity differences. Eastern firms specialize in simpler product varieties generating less consumer value and being manufactured with less or cheaper inputs. Yet, such specialization cannot explain the productivity gap because Eastern firms are physically less productive for given product prices. Hence, there is a genuine price-adjusted physical productivity disadvantage of Eastern compared to Western firms.

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Working Papers


Minimum Wages, Productivity, and Reallocation

Mirja Hälbig Matthias Mertens Steffen Müller

in: IWH Discussion Papers, No. 8, 2023


We study the productivity effect of the German national minimum wage by applying administrative firm data. At the firm level, we confirm positive effects on wages and negative employment effects and document higher productivity even net of output price increases. We find higher wages but no employment effects at the level of aggregate industry × region cells. The minimum wage increased aggregate productivity in manufacturing. We do not find that employment reallocation across firms contributed to these aggregate productivity gains, nor do we find improvements in allocative efficiency. Instead, the productivity gains from the minimum wage result from within-firm productivity improvements only.

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Do Larger Firms Have Higher Markups?

Matthias Mertens Bernardo Mottironi

in: IWH Discussion Papers, No. 1, 2023


Several models posit a positive cross-sectional correlation between markups and firm size, which, among others, characterizes misallocation, factor shares, and gains from trade. Yet, taking labor market power into account in markup estimation, we show that larger firms have lower markups. This correlation turns positive only after conditioning on wage markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias) and hold across 19 European countries. We discuss the resulting implications and highlight studying input and output market power within an integrated framework as an important next step for future research.

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Offshoring, Domestic Employment and Production. Evidence from the German International Sourcing Survey

Wolfhard Kaus Markus Zimmermann

in: IWH Discussion Papers, No. 14, 2022


This paper analyses the effect of offshoring (i.e., the relocation of activities previously performed in-house to foreign countries) on various firm outcomes (domestic employment, production, and productivity). It uses data from the International Sourcing Survey (ISS) 2017 for Germany, linked to other firm level data such as business register and ITGS data. First, we find that offshoring is a rare event: In the sample of firms with 50 or more persons employed, only about 3% of manufacturing firms and 1% of business service firms have performed offshoring in the period 2014-2016. Second, difference-in-differences propensity score matching estimates reveal a negative effect of offshoring on domestic employment and production. Most of this negative effect is not because the offshoring firms shrink, but rather because they don’t grow as fast as the non-offshoring firms. We further decompose the underlying employment dynamics by using direct survey evidence on how many jobs the firms destroyed/created due to offshoring. Moreover, we do not find an effect on labour productivity, since the negative effect on domestic employment and production are more or less of the same size. Third, the German data confirm previous findings for Denmark that offshoring is associated with an increase in the share of ‘produced goods imports’, i.e. offshoring firms increase their imports for the same goods they continue to produce domestically. In contrast, it is not the case that offshoring firms increase the share of intermediate goods imports (a commonly used proxy for offshoring), as defined by the BEC Rev. 5 classification.

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Labour Market Power and Between-Firm Wage (In)Equality

Matthias Mertens

in: IWH Discussion Papers, No. 13, 2020


I study how labour market power affects firm wage differences using German manufacturing sector firm-level data (1995-2016). In past decades, labour market power increasingly moderated rising between-firm wage inequality. This is because high-paying firms possess high and increasing labour market power and pay wages below competitive levels, whereas low-wage firms pay competitive wages. Over time, large, high-wage, high-productivity firms generate increasingly large labour market rents while selling on competitive product markets. This provides novel insights on why such “superstar firms” are profitable and successful. Using micro-aggregated data covering most economic sectors, I validate my results for ten other European countries.

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Intangible Capital and Productivity. Firm-level Evidence from German Manufacturing

Wolfhard Kaus Viktor Slavtchev Markus Zimmermann

in: IWH Discussion Papers, No. 1, 2020


We study the importance of intangible capital (R&D, software, patents) for the measurement of productivity using firm-level panel data from German manufacturing. We first document a number of facts on the evolution of intangible investment over time, and its distribution across firms. Aggregate intangible investment increased over time. However, the distribution of intangible investment, even more so than that of physical investment, is heavily right-skewed, with many firms investing nothing or little, and a few firms having very large intensities. Intangible investment is also lumpy. Firms that invest more intensively in intangibles (per capita or as sales share) also tend to be more productive. In a second step, we estimate production functions with and without intangible capital using recent control function approaches to account for the simultaneity of input choice and unobserved productivity shocks. We find a positive output elasticity for research and development (R&D) and, to a lesser extent, software and patent investment. Moreover, the production function estimates show substantial heterogeneity in the output elasticities across industries and firms. While intangible capital has small effects for firms with low intangible intensity, there are strong positive effects for high-intensity firms. Finally, including intangibles in a gross output production function reduces productivity dispersion (measured by the 90-10 decile range) on average by 3%, in some industries as much as nearly 9%.

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