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Sources and implications of resource misallocation: new evidence from firm-level marginal products and user costs

Simone Lenzu () and Francesco Manaresi ()
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Simone Lenzu: NYU Stern
Francesco Manaresi: Bank of Italy

No 485, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Using micro-data on firm-specific borrowing costs and wages, we demonstrate that distortions in firms’ policies can be empirically measured using firm-level gaps between marginal revenue products and user costs (MRP-cost gaps). We estimate MRP-cost gaps for 4.7 million firm-year observations in Italy between 1997 and 2013: their variation is closely related to the extent of credit and labor market frictions. Using the MRP-cost gaps, we assess the scope of input misallocation in Italy, and its impact on aggregate output and total factor productivity (TFP). The Italian corporate sector could produce 6% to 8% more output by reallocating resources toward higher-value users. Output losses from misallocation are larger (i) during episodes of financial instability, (ii) in non-manufacturing industries, (iii) in areas with less developed institutions and (iv) among high-risk firms. We highlight an important gain/risk tradeoff: gains from reallocation might come at the expense of increasing aggregate financial fragility, because maximizing reallocation gains requires a transfer of resource from large, old, and low-risk firms toward small, young, and high-risk firms.

Keywords: total factor productivity; economic development; policy distortions (search for similar items in EconPapers)
JEL-codes: O16 O40 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff, nep-eur, nep-fdg, nep-mac and nep-tid
Date: 2019-03
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