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Misallocation and Productivity in the Lead Up to the Eurozone Crisis

Daniel Dias (), Carlos Marques () and Christine Richmond ()

No 1146, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We use Portuguese firm-level data to investigate whether changes in resource misallocation may have contributed to the poor economic performance of some southern and peripheral European countries leading up to the Eurozone crisis. We extend Hsieh and Klenow's (2009) methodology to include intermediate inputs and consider all sectors of the economy (agriculture, manufacturing, and services). We find that within-industry misallocation almost doubled between 1996 and 2011. Equalizing total factor revenue productivity across firms within an industry could have boosted valued-added 48 percent and 79 percent above actual levels in 1996 and 2011, respectively. This implies that deteriorating allocative efficiency may have shaved around 1.3 percentage points off the annual GDP growth during the 1996-2011 period. Allocative efficiency deterioration, despite being a widespread phenomenon, is significantly higher in the service sector, with 5 industries accounting for 72 percent of the total variation. Capital distortions are the most important source of potential value-added efficiency gains, especially in the service sector, with a relative contribution increasing over time.

Keywords: Misallocation; wedges; productivity; firm-level data; financial integration (search for similar items in EconPapers)
JEL-codes: D24 O11 O41 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-eec and nep-eff
Date: 2015-09-23
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http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1146.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2015.1146 http://dx.doi.org/10.17016/IFDP.2015.1146 (application/pdf)

Related works:
Journal Article: Misallocation and productivity in the lead up to the Eurozone crisis (2016) Downloads
Working Paper: Misallocation and productivity in the lead up to the Eurozone crisis (2014) Downloads
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DOI: 10.17016/IFDP.2015.1146

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