1887

OECD Economics Department Working Papers

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.

English, French

Insolvency regimes, zombie firms and capital reallocation

This paper explores cross-country differences in the design of insolvency regimes and their potential links with two inter-related sources of labour productivity weakness: the survival of “zombie” firms (firms that would typically exit in a competitive market) and capital misallocation. New cross-country policy indicators of insolvency regimes are constructed based on countries’ responses to a recent OECD questionnaire, which aimed to better capture the key design features of insolvency which impact the timely initiation and resolution of insolvency proceedings. According to these metrics, cross-country differences in the design of insolvency regimes are significant. Firm level analysis shows that reforms to insolvency regimes which reduce barriers to corporate restructuring and the personal cost associated with entrepreneurial failure may reduce the share of capital sunk in zombie firms. These gains are partly realised via the restructuring of weak firms, which in turn spurs the reallocation of capital to more productive firms. These findings carry strong policy implications, in light of the fact that there is much scope to reform insolvency regimes in many OECD countries and given evidence that rising capital misallocation and the increasing survival of low productivity firms have contributed to the productivity slowdown.

 

English

Keywords: zombie firms, firm exit, personal and corporate insolvency, capital misallocation, productivity
JEL: D24: Microeconomics / Production and Organizations / Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity; O47: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence; O40: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Economic Growth and Aggregate Productivity: General; O43: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Institutions and Growth; K35: Law and Economics / Other Substantive Areas of Law / Personal Bankruptcy Law
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