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

93 Pages Posted: 26 Mar 2018 Last revised: 17 Oct 2021

See all articles by Yuriy Gorodnichenko

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Deborah Revoltella

European Union - European Investment Bank

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA; CEPR; IZA; CERGE-EI; University of Ljubljana

Christoph Weiss

European Union - European Investment Bank

Multiple version iconThere are 3 versions of this paper

Date Written: March 2018

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

Gorodnichenko, Yuriy and Revoltella, Deborah and Svejnar, Jan and Weiss, Christoph, Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions (March 2018). Available at SSRN: https://ssrn.com/abstract=3149266

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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Berkeley, CA 94720-3880
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HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Deborah Revoltella

European Union - European Investment Bank

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA ( email )

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CEPR

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United Kingdom

IZA

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University of Ljubljana ( email )

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Christoph Weiss

European Union - European Investment Bank ( email )

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L-2950
Luxembourg

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