Structural change and misallocation: Firm‐level evidence from Poland*

Abstract

Early transition literature linked a large number of firm failures with the inability to overcome the pre-transition misallocation of resources, that is, the inadequate capital-labour ratio. We look at the link between misallocation and firm survival using a rich firm-level dataset of over 1,600 manufacturing plants established in a centrally planned economy after 1945. Our duration models include the standard Olley-Pakes misallocation measures as well as a firm-level measure of the counterfactual level of capital that takes into account the present-day market allocation and productivity. We show that while privatization is positively related to firm survival, misallocation (a) was more of a firm-level than sector-level phenomenon and, more importantly, (b) it, in general, did not have a sizeable effect on the actual firm survival nor it had an impact on the outcome of privatization.