Misallocation and productivity in the lead up to the Eurozone crisis

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. JEL classification: D24, O11, O41, O47

A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?

“…We adopt the framework developed in Klenow (2009, 2011), but extend their model to consider a production function with intermediate inputs, as a third factor of production. The model with three factors of production, as well as the derivation of the full set of results is presented elsewhere (see, Dias et al (2016)), so here we just briefly review the model and summarize the main results needed for our current purposes.…”

“…Most of the empirical studies linking resource misallocation to differences in TFP have been based on data from the manufacturing or agriculture sectors (see, for instance, Hsieh and Klenow (2009), Camacho and Conover (2010), Machicado and Birbuet (2012), Ziebarth (2013), Bellone and Mallen-Pisano (2013), Adamopoulos and Restuccia (2014), Chen and Irarrazabal (2015), Gopinath et al (2015), Calligaris (2015)). Despite services being the largest sector for most countries, either in terms of value added or in terms of total employment, it was only recently that estimates of misallocation for the service sector became available (see for instance Dias et al (2016), Garcia-Santana et al (2015), and Benkovskis (2015) for Portugal, Spain, and Latvia, respectively).…”

“…1 Estimates obtained in Dias et al (2016) for Portugal, for the [2004][2005][2006][2007][2008][2009][2010][2011] period, show that resource misallocation is, on average, 24 percentage points (p.p)…”

“…higher, when evaluated in terms of value added (see Table 4 in Dias et al (2016)). Similarly, estimates in Garcia-Santana et al (2015) for Spain, for the 2001-2007 period, suggest that efficiency gains are around 22 p.p.…”

“…in the service sector and its aggregate implications, we use the theoretical framework developed in Hsieh and Klenow (2009), with the three-factor extension presented in Dias et al (2016).…”