Stochastic productivity measurement

Stochastic productivity indicators are defined, and superlative measures of these indicators are derived. It is shown that, in the presence of complete markets or a common–expectations equilibrium, differences in the market values of firms are superlative indicators of cross–sectional productivity differences. Exactness results are used to decompose nonstochastic productivity indicators into a measure of true productivity change and a measure of ‘luck’. The decomposition is illustrated empirically.