The Sources of Capital Misallocation in Europe

Stephen Byrne and Robert Goodhead
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Stephen Byrne: Central Bank of Ireland
Robert Goodhead: Central Bank of Ireland

No 11/RT/25, Research Technical Papers from Central Bank of Ireland

Abstract: This paper decomposes the sources of capital misallocation at the country and industry level in Europe. Using a comprehensive dataset of European firms from 19 countries, we find that the majority of the observed misallocation stems from persistent firm-specific distortions, with a smaller role for adjustment costs and uncertainty. We document substantial differences in the sources of misallocation across industries. Our analysis reveals strong correlations between these permanent distortions and industry-level variation in both financial factors, and factors relating to productivity. Understanding the factors driving capital misallocation is important for policymakers seeking to address productivity constraints and stimulate growth in the long run.

JEL-codes: E0 O11 O4 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-cfn, nep-eec, nep-eur, nep-fdg and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:cbi:wpaper:11/rt/25

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