Misallocation and Total Factor Productivity in Italy: Evidence from Firm‐Level Data

Over the last two decades, total factor productivity ( TFP ) in I taly decreased by 0.2% per year, while increasing on average in the E uro‐area countries. This decline suggests the existence of large inefficiencies in the allocation of resources, making the I talian case particularly interesting and suitable in order to study the role of misallocation. In this article, I quantify the within‐industry misallocation of inputs in I taly over the period 1993–2011, by applying the H sieh and K lenow's methodology. Using a micro‐level longitudinal dataset of Italian manufacturing firms, I find that, in the hypothetical absence of distortions, aggregate TFP in manufacturing would be boosted by 58% in 1993, by 67% in 2006 and by 80% in 2011. This leads to a twofold conclusion: first, misallocation plays a crucial role in determining the inefficiency level of the I talian manufacturing sector; second, misallocation has increased over time. Given the magnitude of the results obtained and the policy implications related thereto, I take a step ahead by checking to what extent the degree of misallocation can be attributed to specific characteristics of the I talian firms: it emerges that misallocation is higher for firms located in the south and at low‐technological intensity, as well as for small or young firms.