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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
Public Policy and Resource Allocation
Evidence from Firms in OECD Countries
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- Dan Andrews1, Federico Cingano2
- Author Affiliations
- 1: OECD, France
- 2: Bank of Italy, Italy
- 24 Oct 2012
- Bibliographic information
The correlation between a firm’s size and its productivity level varies considerably across OECD countries, suggesting that some countries are more successful at channelling resources to high productivity firms than others. Accordingly, we examine the extent to which regulations affecting product, labour and credit markets influence productivity, via their effect on the efficiency of resource allocation. Our results suggest that there is an economically and statistically robust negative relationship between policy-induced frictions and productivity, though the specific channel depends on the policy considered. In the case of employment protection legislation, product market regulations (including barriers to entry and bankruptcy legislation) and restrictions on foreign direct investment, this is largely traceable to the worsening of allocative efficiency (i.e. a lower correspondence between a firm’s size and its productivity level). By contrast, financial market under-development tends to be associated with a higher fraction of low productivity relative to high productivity firms. Furthermore, stringent regulations are more disruptive to resource allocation in more innovative sectors, though the nature of innovation turns out to be important.
- allocative efficiency, regulations, productivity, firm level data
- JEL Classification:
- D24: Microeconomics / Production and Organizations / Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity
- E23: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Production
- K23: Law and Economics / Regulation and Business Law / Regulated Industries and Administrative Law
- L11: Industrial Organization / Market Structure, Firm Strategy, and Market Performance / Production, Pricing, and Market Structure ; Size Distribution of Firms
- L51: Industrial Organization / Regulation and Industrial Policy / Economics of Regulation