Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics, and Managerial Decisions

Using a new survey, we document high dispersion of marginal revenue products across firms in the European Union. To interpret this dispersion, we develop a highly portable framework to quantify gains from better allocation of resources. We demonstrate that apart from direct measures of distortions, firm characteristics, such as demographics, quality of inputs, utilization of resources, and dynamic adjustment of inputs, are predictors of the marginal revenue products of capital and labor. We emphasize that some firm characteristics may reflect compensating differentials rather than constraints and the effect of constraints on the dispersion of marginal products may be smaller. (JEL D22, D24, D25, E23, G31, L25)