Title: Computing the true spread
Description: How much of the observed labour productivity spread is real? This paper proposes a novel framework to calculate productivity differences between plants accounting for imperfect competition, variations in output prices across plants, endogeneity of factor inputs and measurement error in labour inputs. For UK manufacturing as a whole I find that on average 59 percent of the labour productivity spread is explained by a combination of technical efficiency variations and differences in consumer valuations. Measurement error accounts on average for 9 percent of labour productivity spreads. The paper argues that standard TFP calculations lead to a systematic under-estimation of welfare relevant differences across businesses.