Allocative Efficiency and Finance

40 Pages Posted: 7 Aug 2019

Date Written: April 29, 2019

Abstract

This paper studies the effect of bank lending shocks on aggregate labor productivity. Exploiting a unique administrative dataset covering the universe of Italian manufacturing firms between 2000 and 2015, we apply the Melitz and Polanec (2015) decomposition at the 4-digit industry level to distinguish the contribution to aggregate productivity growth of: changes in surviving firms’ average productivity, market share reallocation among surviving firms, and firm entry and exit. We estimate the impact of credit shocks on each of these components, using data from the Italian Credit Register to construct industry-specific exogenous credit supply shocks. Only for the 2008-2015 period, we find that a tightening in the supply of credit lowers average productivity but increases the covariance between market share and productivity among incumbents, thus boosting the reallocation of labor. We find no significant effects of credit supply shocks on the contribution made by firm entry and exit. We find that the effects of negative credit shocks on average productivity and reallocation are concentrated in industries with a lower share of tangible capital and collateralized debt.

Keywords: credit supply shocks, labor productivity, allocative efficiency

JEL Classification: L25, O47, G01, E44

Suggested Citation

Linarello, Andrea and Petrella, Andrea and Sette, Enrico, Allocative Efficiency and Finance (April 29, 2019). Bank of Italy Occasional Paper No. 487, April 2019, Available at SSRN: https://ssrn.com/abstract=3432990 or http://dx.doi.org/10.2139/ssrn.3432990

Andrea Linarello

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Petrella (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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