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This paper aims to contribute to the debate on the determinants of differentials in firms' productivity. We test the hypothesis that macro factors, especially the quality of local institutions, play a central role in explaining firm productivity in Italy. To this end, we construct measures of Total Factor Productivity (TFP) for about 4,000 firms by means of different estimation techniques, and a province-level index of institutional quality. Then, we estimate the relationship between institutional quality and firm-level TFP. Our results show that the existence of better local institutions might help firms to become more productive.

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Assuming that , i.e. the productive agents are not less numerous than rent-seekers, so that is positive, we can draw the graph of panel (a). A simple argument shows that in this case intersection at point is a stable equilibrium: in fact, for * , , so that rent , 0; 1 0.