Abstract:

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

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 faced by individual firms. 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 percent 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.