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.

/pdf/grouped-patterns-of-heterogeneity-in-panel-data-45chpksxjc.pdf

Grouped Patterns of Heterogeneity in Panel Data

This paper explores the extent to which “zombie” firms – defined as old firms that have persistent problems meeting their interest payments – are stifling labour productivity performance. The results show that the prevalence of and resources sunk in zombie firms have risen since the mid-2000s and that the increasing survival of these low productivity firms at the margins of exit congests markets and constrains the growth of more productive firms. Controlling for cyclical effects, cross-country analysis shows that within-industries over the period 2003-2013, a higher share of industry capital sunk in zombie firms is associated with lower investment and employment growth of the typical non-zombie firm and less productivity-enhancing capital reallocation. Besides limiting the expansion possibilities of healthy incumbent firms, market congestion generated by zombie firms can also create barriers to entry and constrain the post-entry growth of young firms. Finally, we link the rise of zombie firms to the decline in OECD potential output growth through two key channels: business investment and multi-factor productivity growth

The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries

International trade patterns at the product level are surprisingly dynamic. The majority of trade relationships exist for just a few, often only two to four, years. In this paper, I examine empirically the duration in German import trade at the 8-digit product level from 1995 to 2005. I find that survival probabilities are affected by product type, exporter characteristics and market structure. Specifically, I show that the duration of exporting a product to Germany is longer for differentiated products, for products with a low elasticity of substitution, for products obtained from a large exporter that is geographically close to the German market, and for products in markets with increasing import demand.

Die Another Day: Duration in German Import Trade

How do voters react to shocks that are outside the control of politicians? We address this question by studying the electoral impact of wildfires in Spain in the period 1983-2014. This context allo...

https://journals.sagepub.com/doi/pdf/10.1177/0010414019858959

Backing the Incumbent in Difficult Times: The Electoral Impact of Wildfires:

We present a detailed description of cross-country differences in the size distribution of establishments as measured by Enterprise Surveys of the World Bank (2006-2010). We find that poorer countries tend to have smaller establishments, and hence a higher proportion of employment is allocated to such plants. We also find that, conditional on the level of per capita GDP, there is still a wide variation in the size distribution of establishments. We show that financial frictions and other costs imposed on the business environment can account for a sizeable part of such variation. Additionally, we exploit the richness of the data-set to document cross-sector differences in the size distribution of establishments. We show that establishments in manufacturing and construction tend to be larger on average than in retail and other services.

Dissecting the Size Distribution of Establishments Across Countries

En este articulo estimamos el efecto sobre el PIB de los cambios impositivos a partir de una base datos narrativa que hemos construido para el periodo 1986-2015. La estimacion base muestra que un aumento de los impuestos equivalente al 1 % del PIB reduce el producto un 1,3 % despues de un ano; tendiendo este efecto a desaparecer en horizontes mas amplios. Los resultados tambien muestran que el efecto de la imposicion indirecta es mayor y que, despues de un aumento impositivo, la inversion reacciona mas que el consumo. En su conjunto, nuestra estimaciones sugieren que los aumentos impositivos tienen consecuencias negativas sobre el PIB. No obstante, el grado de caida del producto esta sujeto a incertidumbre, ya que las bandas de confianza son amplias. Este resultado esta en linea con la literatura narrativa para otros paises.

The output effects of tax changes: narrative evidence from Spain

The Spanish Social Security System’s deficit rose to 1.5% of GDP in 2015, in contrast to a pre-crisis surplus of 2.2% of GDP in 2007. This deterioration is primarily due to an increase in contributory pension spending (as a % of GDP), as a result of the rise in the dependency ratio, the increase in the pension replacement rate and the decline in the employment rate. Beyond this short-term situation, the Spanish public pension system, as is the case in other developed countries, faces major challenges arising from expectations of significant longevity gains and the attendant growth of the retirement-age population. In this context, this paper aims to contribute to the debate on the situation of the pension system through an analysis of its recent evolution, forward-looking projections that include the impact of the latest reforms and the challenges outstanding.

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The Spanish public pension system : current situation, challenges and reform alternatives

espanol?Puede el Gobierno espanol generar mas ingresos fi scales haciendo mas progresivo el Impuesto sobre la Renta de las Personas Fisicas? Para responder a esta pregunta, construimos una economia de ciclo vital con riesgo sobre la productividad laboral no asegurable y oferta laboral endogena. Ademas, los individuos estan sujetos a impuestos progresivos sobre el trabajo y los ingresos del capital, asi como a una serie de impuestos proporcionales que capturan las cotizaciones sociales, el Impuesto sobre Sociedades y el IVA. Nuestra respuesta es si, pero no mucho. Una reforma que aumenta los impuestos sobre las rentas del trabajo para las personas que ganan mas que el ingreso laboral medio y reduce los impuestos para aquellos que ganan menos que el ingreso laboral medio genera una pequena recaudacion adicional. La recaudacion por el impuesto sobre las rentas del trabajo se maximiza a un tipo marginal efectivo del 51,6 % (38,9 %) para el 1 % (5 %) de las personas con mayor renta, frente al 46,3 % (34,7 %) de la economia de referencia. En este caso, el aumento de la recaudacion del impuesto sobre las rentas del trabajo es de solo un 0,82 %, mientras que la recaudacion fi scal total desciende un 1,55 %, debido a que la mayor progresividad se asocia con una menor oferta de trabajo y capital agregados. Asi, el Gobierno recauda impuestos mas altos de una economia mas pequena. La recaudacion fi scal total es mayor si el aumento de los tipos impositivos marginales afecta solo a las rentas mas altas. Sin embargo, este aumento debe ser sustancial y cubrir a un gran segmento de dichos contribuyentes. Por ejemplo, el aumento de la recaudacion como resultado de un aumento de 3 puntos porcentuales del tipo marginal sobre el 1 % de los que mas ganan es solo del 0,09 %. Por el contrario, un aumento de 10 puntos porcentuales sobre el 10 % de los que mas ganan (aquellos con ingresos laborales por encima de 41.699 euros) eleva los ingresos fi scales totales en un 2,81 %. EnglishCan the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners.The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.

Roberto Ramos

Papers

Backing the Incumbent in Difficult Times: The Electoral Impact of Wildfires:

Dissecting the Size Distribution of Establishments Across Countries

The output effects of tax changes: narrative evidence from Spain

The Spanish public pension system : current situation, challenges and reform alternatives

Reforming the individual income tax in Spain