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Firm-level financial frictions and aggregate allocative efficiency

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  • Laurent Maurin
  • Marcin Wolski

Abstract

Capitalizing on the productivity decomposition proposed by Olley and Pakes, we analyse the role of financial factors behind the relatively muted post-crisis rebound in productivity compared to previous upturns in Europe. First, we provide an Ordinary Least Squares framework to decompose the index of sector-level productivity into trend and allocative efficiency components. We then extend our approach to estimate the contribution of firm-level confounders to the sector-level allocative component. Secondly, we find that financial leverage played an important role in explaining the change in aggregate productivity growth in Europe between 2004 and 2017. Thirdly, focusing on Northern and Western Europe, we show that the productivity potential could not be fully exploited due to access to credit conditions. Specifically, reducing collateral bottlenecks could more than double the effectiveness of financial leverage in spurring productivity growth in this region between 2014 and 2017.

Suggested Citation

  • Laurent Maurin & Marcin Wolski, 2024. "Firm-level financial frictions and aggregate allocative efficiency," Oxford Economic Papers, Oxford University Press, vol. 76(4), pages 1052-1070.
    • Handle: RePEc:oup:oxecpp:v:76:y:2024:i:4:p:1052-1070.
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    File URL: http://hdl.handle.net/10.1093/oep/gpae001
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    More about this item

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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