Firm Level Allocative Inefficiency: Evidence from France

A large portion of productivity differentials among locations is related to density. Firms located in denser areas are more productive due to agglomeration economies (Combes et al., 2012). We provide in this paper an explanation of such economies: lower input misallocation. The distribution of resources among heterogeneous firms has relevant consequences on allocative efficiency and denser areas provide a more favorable environment for dynamic matching between employers and employees. Using a methodology proposed by Petrin and Sivadasan (2013) we are able to assess the degree of resource misallocation among firms within sectors for each of the 96 French "Départements". Based on firm-level productivity estimates, we identify in the gap between the value of the marginal product and marginal input price the output loss due to inefficiencies in inputs allocation. Over the period 1993-2007 the average gap at firm level is around 10 thousands euro, showing a relevant increase starting from the early 2000s. Importantly, firms misallocations are lower in denser areas, suggesting that the matching mechanism is playing a role in explaining the productivity premium of agglomerated locations