The Costs of Variety: Productivity of Differentiated Production Inputs

Speaker: Dr Filip Premik

Affiliation: Monash University

Location: Room 215, Chamberlain Building (#35), St Lucia Campus

Zoom: https://uqz.zoom.us/j/82603079317

Abstract: This paper studies heterogeneity in capital production input. In many markets, firms use goods of the same purpose but different make as intermediate inputs in producing final goods or services. If there are gains from specialization, the inputs may become less productive with an increase in variety, regardless of their quality, price, or vintage. We investigate the resulting costs of variety using unique data on urban bus fleets, for whom buses are the capital input, and whose discretion in the choice of bus supplier is restricted by public procurement procedures. Leveraging multiple quasi-experimental shocks across markets and time, we show that the same bus is more utilized in a fleet with a higher share of similar buses than in a fleet composed of substantially different buses, and that the bus operators respond to such friction by increasing the size of the fleets rather than adjusting labor inputs. We propose a methodology of estimating production functions with horizontal input differentiation to quantify the costs of variety.