Public policy and resource allocation: evidence from firms in OECD countries

Abstract

The correlation between a firm's size and its productivity level varies considerably across OECD countries, suggesting that some countries are more successful at channelling resources to high productivity firms than others. Accordingly, we examine the extent to which regulations affecting product, labour and credit markets influence productivity, via their effect on the efficiency of resource allocation. Our results suggest that there is an economically and statistically robust negative relationship between policy-induced frictions and productivity, though the specific channel depends on the policy considered. In the case of employment protection legislation, product market regulations (including barriers to entry and bankruptcy legislation) and restrictions on foreign direct investment, this is largely traceable to the worsening of allocative efficiency (i.e. a lower correspondence between a firm's size and its productivity level). By contrast, financial market under-development tends to be associated with a higher fraction of low productivity relative to high productivity firms. Furthermore, stringent regulations are more disruptive to resource allocation in more innovative sectors, though the nature of innovation turns out to be important.

Skill Mismatch and Public Policy in OECD Countries

“…One explanation for this could be that as firms draw from a scarce and fixed pool of skilled labour, trapping resources in relatively low productivity firms -which tends to occur in industries with a high share of over-skilled workers -can make it more difficult for more productive firms to attract skilled labour and gain market shares at the expense of less productive firms (Adalet McGowan and Andrews, 2015). Given the link between mismatch and allocative efficiency, and existing evidence that framework policies affect reallocation (Andrews and Cingano, 2014), the working hypothesis in this paper is that cross-country differences in skill mismatch may partly reflect regulations affecting product and labour markets and bankruptcy proceedings.…”

“…over-skilling) and labour productivity via the allocative efficiency channel (Adalet McGowan and Andrews, 2015) suggests that policy determinants of skill mismatch should focus particularly on those policy factors that impose frictions to the efficient reallocation of labour. Previous research has highlighted the effects of flexible product and labour market regulations and bankruptcy legislation that does not excessively penalise business failure on the efficiency of resource allocation (Andrews and Cingano, 2014). Given this, skill mismatch might be one channel through which such framework policies affect labour productivity.…”

Trade Specialisation and Policies to Foster Competition and Innovation in Denmark

“…Cross-country analyses find that allocative efficiency has been relatively low in Denmark, especially in the services sector. The most productive firms do not attract a large share of employment (Bartelsman, 2013;Andrews and Cingano, 2012;Productivity Commission, 2013b). Many sectors have a large number of low-productivity firms, partly due to this low allocative efficiency (Danish Economic Council, 2010).…”

Insolvency Regimes And Productivity Growth

“…For example, see Westmore (2013) and Saia et al (2015) for links with productivity spillovers; Andrews and Cingano (2014) for links with labour misallocation; Andrews, Criscuolo and Menon (2014) for links with capital misallocation; and Adalet McGowan and Andrews (2015) for links with skill mismatch. management, treatment of dissenting creditors, role of courts, emphasis on employment preservation and the availability of a fresh start.…”

“…In addition to strengthening market selection, such reforms will increase the likelihood that the resources released by exiting firms will be reallocated to more productive uses, given the positive association between pro-competitive reforms and allocative efficiency (Andrews and Cingano, 2014).…”