Distortions in Firm Selection During Recessions


Attenzione: gli ordini effettuati a partire da venerdì 2 agosto saranno spediti a partire da lunedì 26 agosto.


Recent  evidence  documents  the  weakness  of  market  selection  based  on  productivity  differentials and the absence of cleansing during recessions. This paper argues that a possible explanation lies in the role of competitive rents, i.e., market advantages due to idiosyncrasies of  the  firm’s  demand.  Competitive  rents  allow  firms  to  sustain  profit  independently  of  their  internal  efficiency,  creating  a  selection  advantage.  During  an  economic  recession,  this advantage increases because competitive rents operate as a resilience factor. The process of firm  selection  can  thus  be  distorted  with  relatively  inefficient  firms  that manage  to  survive.  These predictions are tested on a sample of French, Italian, and Spanish manufacturing firms, looking at the selection that took place during the Great Recession. Ceteris paribus, firms with competitive  rents  are  less  likely  to  exit  than  firms  without  competitive  rents.  This  effect  is  stronger  in  countries  more  severely  impacted  by  the  downturn.  The  implications  of  these results for policy interventions to sustain aggregate productivity growth are discussed.