On the Anatomy of Productivity Growth: A Decomposition of the Fisher Ideal TFP Index

Decompositions of productivity indices contribute to our understanding of what drives the observed productivity changes by providing a detailed picture of their constituents. This paper presents the most comprehensive decomposition of total factor productivity (TFP) to date. Starting from the Fisher ideal TFP index, we systematically isolate the productivity effects of changes in production technology, technical efficiency, scale efficiency, allocative efficiency, and the market strength. The three efficiency components further decompose into input- and output-side effects. The proposed decomposition is illustrated with an empirical application to a sample of 459 Finnish farms over period 1992-2000.