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On the cleansing effect of recessions and government policy: Evidence from Covid-19

Nicholas Kozeniauskas, Pedro Moreira and Cezar Santos ()

European Economic Review, 2022, vol. 144, issue C

Abstract: Recessions can have a cleansing effect by encouraging the reallocation of resources from low-productivity firms towards higher-productivity ones. Whether this effect actually occurs is still debated. We contribute to answering this question by providing new evidence. Using a survey of firms matched with administrative data, we trace out the Covid-19 recession’s effects across the productivity distribution. Higher-productivity firms are found to have been more successful at maintaining employment, but there was not a rise in exit amongst lower-productivity firms. In line with the theory that support policies offset the cleansing effect of recessions, high-productivity firms are also found to have been less likely to take up government support.

Keywords: Firms; Productivity; Policies; Cleansing effect; Covid-19 (search for similar items in EconPapers)
JEL-codes: D22 E24 H81 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.euroecorev.2022.104097

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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