Estimating firm level TFP Ralf Martin * October 16, 2006 This document explains an adaption of the estimator developed in Martin (2005) for the econometric and statistical software package STATA It is an estimator of firm level TFP with the following features • Flexible functional form production function with non-constant returns to scale • Imperfect competition (Dixit-Stiglitz Market structure) • Novel method to control for production factor endogeneity and endo- geneity because of firm exit (inspired by Olley and Pakes (1996)) Because the original paper which introduced this estimator is titled ”Com- puting the true spread”, I will refer to the estimator below as the TRUE estimator below. The STATA programme which implements the estimator is equally called true2.ado. 1 1 Background The starting point for the framework is a firm level revenue production func- tion framework according to which revenue of firm i at time t can be written as: r it = α M it μ + α K it μ k it + α L it μ l it + ω it + η it (1) where ω it = 1 μ (a it + λ it ) is the composite of a demand (λ) and supply shock (a). μ> 1 is a markup parameter. Assuming that μ is constant across firms * Centre for Economic Performance (CEP), London School of Economics (LSE), r.martin@lse.ac.uk 1 This should by no means imply that I have found a way to establish absolute truths using econometric methods I am afraid. 1