Italy’s Productivity Conundrum. A Study on Resource Misallocation in Italy

This paper provides a detailed analysis of the patterns of misallocation in Italy since the early 1990s. In particular, we show that the extent of misallocation has substantially increased since 1995, and that this increase can account for a large fraction of the Italian productivity slowdown since then. We gather evidence on the evolution of firm level misallocation both within and between various categories of firms, in particular those based on geographic areas, industries, and firm size classes. We do so both for firms in manufacturing and for firms in non-manufacturing. Overall, looking at the distribution of firm productivity, we uncover a thickening of the left tail as the share of firms with low productivity has increased over the period. This implies not only a decrease in average firm productivity, but also an increase in its dispersion. We show that the increase in misallocation has come mainly from higher dispersion of productivities within different firm size classes and geographical areas rather than between them. Crucially, we highlight that rising misallocation has hit firm categories that are traditionally the spearhead of the Italian economy such as firms in the Northwest and big firms. We also produce evidence that, while the 2008 crisis seems to have triggered, at least until 2013, a ‘cleansing effect’ of the least productive firms in the manufacturing sector as a whole, in non-manufacturing industries one observes the survival of firms with even lower productivities than they used to have. Finally, we propose a novel methodology to assess which firm characteristics are more strongly associated with misallocation. In particular, we investigate the role of corporate ownership/control and governance, finance, workforce composition, internationalisation, cronyism and innovation. Together with the other findings already highlighted, the analysis of those ‘markers’ provides the ground for a policy-oriented discussion on how to tackle the Italian productivity slowdown.