Do Marginal Products Differ from User Costs? Micro-Level Evidence from Italian Firms

Abstract

Using micro-data on firm-specific borrowing costs and wages, we demonstrate that distortions in firms' employment and investment 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 million firm-year observations in Italy between 1997 and 2013, showing that the variation in these measures is closely related to the extent of credit market frictions and to the degree of labor market rigidities individual firms face.Using the estimated MRP-cost gaps, we propose a reallocation algorithm that helps us assess the scope of capital and labor misallocation in Italy, and its impact on aggregate output and total factor productivity (TFP). We calculate that, holding constant the aggregate capital and labor endowments in the economy, the Italian corporate sector could produce between 3% to 4% more output by reallocating resources from over-endowed producers toward higher-value users. The output losses from misallocation are larger during episodes of macro-financial instability, in non-manufacturing industries, and in geographical regions with less developed socio-economic institutions.

Credit Supply and Productivity Growth

“…13 The CR contains data on the outstanding bank debt of each borrower, categorized into loans backed by accounts receivable, term loans, and revolving credit lines. CR data can be matched 10 See Lenzu & Manaresi (2018) for details on PIM. We thank Francesca Lotti for providing capital series for an early version of this paper.…”

“…6 See De Loecker (2013) for a conceptually similar case regarding the effect of exporting on efficiency. Lenzu & Manaresi (2018), and Linarello et al (2018) . Review of Economic Dynamics had a special issue on "Misallocation and Productivity" in January 2013.…”

Financing the Gig Economy

“…My paper additionally speaks to a long line of research emphasizing the importance of the financial system for growth (e.g., as in Mian, Sufi, and Verner (2017), Kaplan and Zingales (1997), Jayaratne and Strahan (1996)) and finance for productivity (i.e., in remedying the sorts of misallocations as in Hsieh and Klenow (2009); see Lenzu and Manaresi (2018), Buera, Kaboski, and Shin (2011), and Midrigan and Xu (2014)). My paper contributes to this work by highlighting the importance of ex ante factor misallocation when a disruptive technological change is introduced that impacts how capital can be used.…”