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In this dissertation, I combine two papers that study the extent and implications of resource misallocation across firms. ,In the first chapter, written with Francesco Manaresi, we rely on first principles of economic theory to measure capital and labor misallocation at the firm level. Using a novel micro-database 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 individual firms face. 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% more output by reallocating resources from over-endowed producers to 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.,In the second chapter, I focus on the fundamental role played by financial intermediaries in enhancing economic growth, lending to firms and households and reallocating capital to the highest-value use. In this paper, joint work with Margherita Bottero and Filippo Mezzanotti, we study the role played by banks' security portfolio in the propagation of macro-financial shocks originated outside national borders. We document that swings in the price and riskiness of securities assets may lead to adjustments in banks' credit supply, with potential adverse effects on the real economy. In particular, in the context of the European crisis, we show that the shock to the banks' sovereign portfolio caused by the 2010 Greek bailout was passed on to Italian firms through a credit contraction. This was particularly the case for banks with a weaker balance sheet. The contraction in credit was similar for both large and small firms, but it only negatively affected the investment and employment decisions of smaller firms.


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