Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway

Capital Allocation and Productivity in South Europe

Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that is consistent with important aspects of firms’ behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a significant decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

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This paper introduces time-varying grouped patterns of heterogeneity in linear panel data models. A distinctive feature of our approach is that group membership is left unspecified. We estimate the parameters of the model using a “grouped fixed-effects” estimator that minimizes a least-squares criterion with respect to all possible groupings of the cross-sectional units. We rely on recent advances in the clustering literature for fast and efficient computation. Our estimator is higher-order unbiased as both dimensions of the panel tend to infinity, under conditions that we characterize. As a result, statistical inference is not affected by the fact that group membership is estimated. We apply our approach to study the link between income and democracy across countries, while allowing for grouped patterns of unobserved heterogeneity. The results shed new light on the evolution of political and economic outcomes of countries.

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Grouped Patterns of Heterogeneity in Panel Data

We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

https://papers.ssrn.com/sol3/Delivery.cfm/dp7241.pdf?abstractid=2230803&mirid=1

Firm Size Distortions and the Productivity Distribution: Evidence from France

Why do living standards differ so much across countries? A consensus in the development literature is that differences in productivity are a dominant source of these differences. But what accounts for productivity differences across countries? One explanation is that frontier technologies and best practice methods are slow to diffuse to low-income countries. The recent literature on misallocation offers a distinct but complementary explanation: low-income countries are not as effective in allocating their factors of production to their most efficient use. We provide our perspective on three key questions. First, how important is misallocation? Second, what are the causes of misallocation? And third, beyond the direct cost of lower contemporaneous output, are there additional costs associated with misallocation? A summary of our answers is as follows: Misallocation appears to be a substantial channel in accounting for productivity differences across countries, but the measured magnitude of the eff...

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The Causes and Costs of Misallocation

Spanish GDP grew at an average rate of 3.5% per year during the 1995-2007 expansion, well above the EU average of 2.2%. However, this growth was based on factor accumulation rather than productivity gains as TFP fell at an annual rate of 0.7%. Using firm-level administrative data for all sectors we show that deterioration in the allocative efficiency of productive factors across firms was at the root of the low TFP growth in Spain, while misallocation across sectors played only a minor role. We show that within-industry misallocation of production factors increased substantially over the period in all industries. Absent such deterioration, average TFP growth would have been around 0.8% per year, in line with the growth of the technological frontier. Cross-industry variation reveals that the increase in misallocation was more severe in sectors where the incidence of regulations is greater. In contrast, sectoral differences in financial dependence, skill intensity, innovative content, tradability and the intensity of capital structures appear to be unrelated to changes in allocative efficiency. All in all, the observed high output growth together with increasing firm-level misallocation in all sectors is consistent with an expansion driven by a demand boom rather than by structural reforms.

https://papers.ssrn.com/sol3/Delivery.cfm/DP11144.pdf?abstractid=2766435&mirid=5

Growing Like Spain: 1995-2007

Recent decades have witnessed a surge of trade in intermediate goods and a proliferation of free trade agreements (FTAs). FTAs use rules of origin (RoO) to distinguish goods originating from member countries from those originating from third countries. In this paper, we show that the sourcing restrictions embedded in RoO greatly distort trade in intermediaries. We focus on the North American Free Trade Agreement (NAFTA), the world's largest FTA, and construct a unique dataset that allows us to map the input‐output linkages in its RoO. Using a difference‐in‐differences approach, we find that RoO on final goods reduced imports of intermediate goods from third countries by around 30 percentage points. Even if external tariffs are unchanged, FTAs may thus violate multilateral trade rules, by substantially increasing the level of protection faced by non‐members.

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From Final Goods to Inputs: The Protectionist Effect of Rules of Origin

The Reservation Laws in India and the Misallocation of Production Factors

Cada ano se invierte una significativa cantidad de recursos en mejorar las infraestructuras de transporte de los paises en desarrollo. En este articulo investigamos los efectos de un gran proyecto de este tipo: el Golden Quadrilateral de la India. Para ello, utilizamos un modelo de comercio interno con margenes variables. En contraste con la literatura previa, el modelo incorpora diversos canales a traves de los cuales la infraestructura de transporte afecta al bienestar. En particular, el modelo tiene en cuenta las ganancias provenientes de la eficiencia en la asignacion de recursos en la economia. Calibramos el modelo para 
el sector manufacturero de la India y encontramos que las ganancias reales del producto ascienden al 2,7 %. Ademas, la mejora en la asignacion explica el 7,4 % de dichas ganancias. La importancia de este canal varia en gran medida por Estados, pudiendo explicar hasta el 18 % de las ganancias en algunos de ellos. El resto de la mejora en el bienestar se explica por cambios en los ingresos laborales, la eficiencia productiva y los margenes medios, que afectan a los terminos de intercambio de los Estados.

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Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

We study the relationship between economic distortions and the size distribution of plants using comparable plant-level data across 104 developing countries. Our main result is to show that, other things equal, countries with larger economic distortions allocate more labor to small unproductive units. By decomposing the business environment into different type of distortions, we find that poor access to financial credit is the one driving our results. We also show that there exists a significant cross-country relationship between the size distribution and aggregate productivity. These results are consistent with a large recent literature on misallocation of resources across firms.

/pdf/distortions-and-the-size-distribution-of-plants-evidence-45m0hhvne3.pdf

Manuel García-Santana

Papers

Growing Like Spain: 1995-2007

From Final Goods to Inputs: The Protectionist Effect of Rules of Origin

The Reservation Laws in India and the Misallocation of Production Factors

Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

Distortions and the size distribution of plants: evidence from cross-country data