Productivity growth and pollution in state manufacturing

The directional output distance function (Chambers, Chung, & Fare, 1996) is used to construct a Malmquist-Luenberger index of total factor productivity growth for manufacturing when both good and bad outputs are jointly produced. The index is constructed using information on good and bad output quantities and input quantities, circumventing the problem of recovering shadow price information for the bad output needed for the Fisher or Tornqvist type of productivity indices. Accounting for toxic releases in manufacturing, productivity growth averages 1.4% annually during 1988-1994. The findings also suggest that the failure to account for toxic releases in manufacturing results in a significant understatement of total factor productivity growth.