Sources and Implications of Resource Misallocation: New Evidence from Firm-Level Marginal Products and User Costs

72 Pages Posted: 7 Aug 2019

See all articles by Simone Lenzu

Simone Lenzu

NYU Stern School of Business

Francesco Manaresi

Bank of Italy

Date Written: March 18, 2019

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

JEL Classification: O16, O40, E24

Suggested Citation

Lenzu, Simone and Manaresi, Francesco, Sources and Implications of Resource Misallocation: New Evidence from Firm-Level Marginal Products and User Costs (March 18, 2019). Bank of Italy Occasional Paper No. 485, March 2019. Available at SSRN: https://ssrn.com/abstract=3432978 or http://dx.doi.org/10.2139/ssrn.3432978

Simone Lenzu

NYU Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://simonelenzu.com

Francesco Manaresi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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