CDEP-CGEG WORKING PAPER NO. 71

Exploring the wide dispersion in productivity among European firms

Yuriy Gorodnichenko, Debora Revoltella, Jan Svejnar, and Christoph Weiss

Abstract:

Many barriers keep resources from flowing to the most efficient firms in the European Union, with negative consequences for macroeconomic performance. Although a key objective of the EU has been to improve the allocation of resources across member countries, the dispersion of productivity among firms remains relatively large. Using data from a new survey of firms in all 28 EU countries, this column argues that reducing differences in the business environment across countries and industries could increase EU GDP by at least 18 percent. It also shows that reducing the dispersion in the marginal revenue products of EU firms to the level of the United States – a change that would likely require many significant policy reforms – could increase aggregate output in the EU by more than 20 percent. In addition, it finds that the use of firm-level characteristics can help better understand the potential sources of distortions in the allocation of resources across firms.

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