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Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions

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  • Yuriy Gorodnichenko
  • Debora Revoltella
  • Jan Svejnar
  • Christoph T. Weiss

Abstract

Using a new survey, we document high dispersion of marginal revenue products across firms in the European Union (EU). To interpret this dispersion, we develop a highly portable framework to quantify gains from better allocation of resources. We demonstrate that, apart from direct measures of distortions, firm characteristics, such as demographics, quality of inputs, utilization of resources, and dynamic adjustment of inputs, are predictors of the marginal revenue products of capital and labor. We emphasize that some firm characteristics may reflect compensating differentials rather than constraints and the effect of constraints on the dispersion of marginal products may hence be smaller than has been assumed in the literature. We show that cross-country differences in the dispersion of marginal products in the EU are largely due to differences in how the business, institutional and policy environment translates firm characteristics into outcomes rather than to the differences in firm characteristics per se . Removing distortions could raise EU aggregate productivity by 40 percent or more.

Suggested Citation

  • Yuriy Gorodnichenko & Debora Revoltella & Jan Svejnar & Christoph T. Weiss, 2018. "Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions," NBER Working Papers 24444, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24444
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    Cited by:

    1. Shalini Mitra, 2018. "Persistent Misallocation and the Productivity Slowdown in EU," Working Papers 201812, University of Liverpool, Department of Economics.
    2. Tiziano Ropele & Yuriy Gorodnichenko & Olivier Coibion, 2023. "Inflation Expectations and Misallocation of Resources: Evidence from Italy," NBER Working Papers 31190, National Bureau of Economic Research, Inc.
    3. Gargan, Eric & Kenny, Eoin & O’Regan, Cynthia & O’Toole, Conor, 2023. "A cross country perspective on Irish enterprise investment: Do fundamentals or constraints matter?," Papers WP754, Economic and Social Research Institute (ESRI).
    4. Maurin, Laurent & Wolski, Marcin, 2021. "Aggregate productivity slowdown in Europe: New evidence from corporate balance sheets," EIB Working Papers 2021/04, European Investment Bank (EIB).
    5. Maurice J.G. Bun & Jasper Winter, 2022. "Capital and labor misallocation in the Netherlands," Journal of Productivity Analysis, Springer, vol. 57(1), pages 93-113, February.
    6. Anyfantaki, Sofia & Caloghirou, Yannis & Dellis, Konstantinos & Karadimitropoulou, Aikaterini & Petroulakis, Filippos, 2024. "The need for an industrial policy for long-term growth," LSE Research Online Documents on Economics 121983, London School of Economics and Political Science, LSE Library.
    7. Ranasinghe, Ashantha, 2024. "Misallocation across establishment gender," Journal of Comparative Economics, Elsevier, vol. 52(1), pages 183-206.
    8. Norbert Ernst & Nico Pintar & Richard Sellner, 2023. "Resource Misallocation and TFP Gap Development in Austria (Richard Sellner, Nico Pintar, Norbert Ernst)," Working Papers 246, Oesterreichische Nationalbank (Austrian Central Bank).
    9. Sofia Anyfantaki & Yannis Caloghirou & Konstantinos Dellis & Aikaterini Karadimitropoulou & Filippos Petroulakis, 2024. "The 2013 Cypriot Banking Crisis and Blame Attribution: survey evidence from the first application of a bail-in in the Eurozone," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 193, Hellenic Observatory, LSE.
    10. Maurice Bun & Jasper de Winter, 2019. "Measuring trends and persistence in capital and labor misallocation," DNB Working Papers 639, Netherlands Central Bank, Research Department.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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