EIB Working Papers 2018/06 - Resource Misallocation in European Firms

Using EIBIS, this paper shows that the dispersion of marginal products across firms in the European Union is about twice as large as that in the United States and estimate potential increases in GDP from the removal of barriers between industries and countries.

It examines the role of firm characteristics and emphasizes that some firm characteristics may reflect compensating differentials rather than constraints and the effect of constraints on the dispersion of marginal products may hence be smaller than has been assumed in the literature.

It also shows that cross-country differences in the dispersion of marginal products are more due to differences in how the business, institutional and policy environment translates firm characteristics into outcomes than to the differences in firm characteristics per se.