Italy: Selected Issues
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International Monetary Fund. European Dept.
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Publication Date:
07 Jul 2015
eISBN:
9781513559681
Language:
English
Keywords:
ISCR; CR; firm; micro firm; firm level; firm data; firm Type; equivalent firm; return on assets; Productivity; Public expenditure review; Labor productivity; Global
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Italy: Selected Issues

Abstract

Italy: Selected Issues

Does Public Sector Inefficiency Constrain Firm Productivity: Evidence from Italian Provinces1

This paper establishes a causal link between public sector efficiency at the provincial level and firm productivity using data for about 450,000 Italian firms. Significant productivity gains could be realized if public sector efficiency improved from currently low levels. If efficiency rose to the frontier in all provinces, output per employee would increase 9 percent for the average firm. Implementing the public adminstration reform agenda and recommendations of the 2014 spending review and competition authority could help deliver some of these productivity gains.

A. Introduction

1. Italy’s productivity has been stagnant since the late 1990s. Labor productivity defined as real GDP per hour worked increased a meager 3.5 percent, while TFP fell a cumulative 7.5 percent since Italy adopted the euro in 1998. As a result, a wide gap has emerged between Italy’s productivity and that of most major OECD economies (Figure 1). Addressing the productivity problem is essential to boost growth in Italy. A recovery in investment and employment creation will expand output in the near term as the economy emerges from a deep recession. However, productivity gains are necessary to lay the foundations for sustainable growth in the long run.

Figure 1.
Figure 1.

Italy: Evolution of Aggregate Productivity

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

Source: Total Economy Database (TED). Labor productivity is measured as GDP per hour worked.

2. Identifying the key source of Italy’s low productivity is difficult. Many hypotheses have been put forth in trying to explain Italy’s lack of productivity growth—structural deficiencies related to the sectoral specialization of Italian manufacturing (Ciriaci and Palma, 2008) and a business model, which relies predominantly on micro and small firms, and institutional factors, such as labor regulations (Daveri and Parisi, 2010), judicial inefficiency (Giacomelli and Menon, 2013, Esposito and others, 2013), and availability of key factors of production, such as human and entrepreneurship capital and managerial knowhow (e.g., Bandiera and others, 2008; Brasili and Federico, 2008; Bloom and others, 2008). Pellegrino and Zingales (2014) examine systematically the various possible explanations of Italy’s productivity slowdown. Using industry level data across 23 sectors in 15 countries, they conclude that the main cause of Italy’s “disease” is the inability of small firms to adjust to the global change of the 2000s, namely the rise of China and the ICT revolution, due to a lack of managerial talent. This in turn is the outcome of a deeply-rooted system of familism and cronyism.

3. Could public sector inefficiency be holding back firm productivity? Italy lags behind other advanced economies on various measures of public sector efficiency. Among OECD economies, it gets some of the lowest scores on direct efficiency measures as experienced by firms on the ground such as the number of days and cost to get a construction permit, enforce a contract, get electricity or pay taxes according to the World Bank Doing Business indicators (WB, 2015). Perception based measures of efficiency, as compiled by the World Economic Forum, Global Competitiveness Survey, paint a similar picture, with Italy ranking amongst the worst on measures of government efficiency, wastefulness of government spending, diversion of public funds, etc. (Figure 2). As government services are inputs into firms’ production processes, their inefficient provision may lower the marginal productivity of labor and capital employed by the firm.

Figure 2.
Figure 2.

Italy: Measures of Government Efficiency

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

Source: World Bank Doing Business Indicators, and World Economic Forum, Global Competitiveness Survey (2014).

4. This paper provides new evidence on the role of Italy’s inefficient public sector in explaining its low levels of productivity. Exploiting the significant variation that exists in the efficiency of the government service provision across Italian provinces, the inter-industry differences in government dependence and detailed firm level data, we ask the following questions: (i) does public sector inefficiency lead to lower firm level productivity?; (ii) which types of firms are more affected by government inefficiency, and what types of services matter the most?; and (iii) what would be the macroeconomic gains from raising the efficiency of the public sector?2 The remainder of this paper is structured as follows: Section B outlines the empirical strategy used to estimate the causal effect of public sector efficiency on firm productivity and describes the data used in the analysis; Section C presents the main results and discusses the robustness of the findings; and Section D offers some policy considerations for Italy and concludes.

B. Empirical Strategy, Data and Measurement

Empirical Strategy

5. Italy is characterized by large regional disparities in government efficiency. The subnational Doing Business survey conducted in 2013 highlights a significant gap between the relatively efficient Center-North and the lagging South: it takes more than twice the number of days to get a construction permit in Sicily than in Lombardy. In fact, of all European economies, Italy has the largest variation between its worst and best performing region according to the European Quality of Governance Index (Figure 3). A similar pattern of geographical variation emerges from an efficiency measure at the more-disaggregated provincial level (explained in more detail below).3 Giacomelli and Tonello (2015) also document significant heterogeneity in the performance of local governments.

Figure 3.
Figure 3.

Italy: Regional Variation in Government Efficiency in Italy

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

6. Similarly, there are substantial regional disparities in firm productivity. The median firm in the North produces 9½ percent more per euro spent on employees than the median firm in the South. The median return on assets is 180bps higher.4 Even a casual visual inspection reveals that provinces that have higher public sector efficiency also tend to have higher firm level productivity; a finding also confirmed by the relatively tight correlation between the two variables (Figure 4). However, this simple correlation does not necessarily imply that public sector efficiency affects firm productivity. Provinces with low public sector efficiency may have different industrial structure, different size composition of firms, and may differ in a host of other ways that affect labor productivity, independently of government efficiency.

Figure 4.
Figure 4.

Italy: Public Sector Efficiency and Firm Labor Productivity at the Province Level

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

Notes: Province-level public sector efficiency is from Giordano and Tommasino (2011). Firm labor productivity is measured as real output per employee cost. The map on the right panel plots the median for each province based on 2007 Orbis data.

7. In order to establish a causal link between government efficiency and firm productivity, we employ a simple difference-in-difference empirical strategy. Akin to the Rajan and Zingales (1998) framework, the identifying assumption is that productivity of firms in sectors that are more reliant on the government would be more affected by government inefficiency. In other words, the causal effect of government efficiency is captured in the difference in productivity of firms in sectors highly dependent on the government and those not very dependent of the government in provinces with high government efficiency, and that difference in provinces with low government efficiency. The following equation is estimated at the firm level using data from 2007:

Y i s p = β * G o v D e p s * G o v E f f p + γ X i s p + α p + α s + ε i s p ( 1 )

Where Yisp is the productivity of firm i in sector s and province p. In the interaction term, GovDeps measures how dependent firms in sector s are on the public sector and GovEffp how efficient the public sector is in province p. Xisp contains firm-specific control variables, namely a set of indicators for firm size.5 αp is a set of province fixed effects and αs a set of sector fixed effects (658 sectors, four-digit NACE Revision 2 classification). εisp is an error term.

8. In this estimation equation, the coefficient β captures the causal effect of higher public sector efficiency on firm performance. The 600+ sector fixed effects control for any differences in productivity that may exist across sectors including from cyclical factors, such as, demand for output in the sector, and structural sectoral characteristics, such as technology and input requirement, R&D intensity, etc. The biggest advantage of our specification is that we can control for all institutional and geographical factors that affect the productivity of all firms in the province equally (such as, for example, factor endowments, attitude towards work, climate, degree of civil engagement, and trust, etc.) through the province fixed effects.

Measuring Firm Dependence on the Public Sector

9. A key input for this empirical strategy is the dependence of firms in different industries on the public sector. We rely on a new indicator, developed by Pellegrino and Zingales (2014), which proxies government dependence by the frequency of news about a certain sector also mentioning the government. More specifically, the authors calculate for 21 sectors the percentage of news, containing words like “government”, “regulation” in total sector news in Factiva over the period 2000–12. The measure is admittedly imperfect but understandably so given the difficulty of accurately measuring the use of public sector services by industries. Figure 5 depicts the degree of government dependence according to this measure. Not surprisingly, sectors such as agriculture, electricity, and construction are ranked as some of the most government dependent. As a robustness check, we construct an alternative measure of government dependence, using the share of output of a sector sold to the government according to the economy-wide input-output matrix. Our findings, based on this measure, are discussed in Section C in greater detail.

Figure 5.
Figure 5.

Italy: Sectoral Dependence on the Government

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

Source: Pellegrino and Zingales (2014).

Measuring Public Sector Efficiency at the Province Level

10. The efficiency of public spending captures how efficiently government units transform inputs into outputs relative to the most efficient province. Using province-level data on public spending and outputs of five key public services, Giordano and Tommasino (2011) estimate an efficient production frontier using a nonparametric Data Envelopment Analysis (DEA) method. The government efficiency of each of the 103 Italian provinces is then assessed based on its distance to the production frontier.6

11. Efficiency is calculated for five spending categories on or around 2007: health care, education, civil justice, child care, and waste collection. Two of them are the responsibility of the central government (education and civil justice), one is within the remit of the regional governments (health), while child care and waste collection are administered by the local governments. Depending on the sector, we consider averages over a given time period (assuming that it takes time for public spending to influence outcomes) or the most recent year for which data are available. Table 1 details the input and output variables used to calculate efficiency in each category. The GovEff score used in equation (1) is a simple average across the five categories. Higher values mean higher efficiency. The score would be one for a province that was the most efficient in the country in each category. Table 2 summarizes the efficiency indicators aggregated at the region and macro-region levels. Similarly to the subnational Doing Business survey and the European Quality of Governance index, there is a north-south gap in the efficiency of the public sector.

Table 1.

Italy: Inputs and Outputs Used to Construct Provincial Public Efficiency Indicators

article image
Table 2.

Italy: Public Sector Efficiency Indicators (Output-Oriented DEA)

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Source: Giordano and Tommasino (2011)

Regional values are obtained as simple averages of provincial values.

Measuring Firm Productivity

12. Firm data are from the Orbis database, which offers unique coverage of micro, small, and medium Italian firms. The Orbis database, compiled by Bureau van Dijk, includes all companies required to submit accounts with the Italian Chamber of Commerce. It thus includes a very significant portion of the micro, small, and medium enterprises, which constitute the bulk of economic activity in Italy, but are rarely represented in other commonly-used firm level datasets.7 The coverage in the Orbis database is high: the firms included in the database account for roughly 70 percent of the gross value added, and 75 percent of the total wage bill of Italy’s nonfinancial corporations. The raw dataset contains balance sheets, income statements, geographical information, and industrial classification for about 650,000 firms in 2007. Missing variables and data cleaning reduce the sample to about 450,000 firms.

13. We use several indicators to measure firm-level productivity: (i) the ratio of operating revenue to costs of employees; (ii) the ratio of gross value added to cost of employees; (iii) operating revenue per worker; (iv) gross value added per worker; (v) operating revenue; and (vi) return on assets (defined as EBIT over total assets). Our preferred measures of labor productivity are the ratios to costs of employees for two reasons: (i) firms often do not report the number of employees, hence using the costs of employees increases the sample size; and (ii) by controlling for difference in wage levels across firms, we partially account for variations in the skill level of workers. Measures (i)–(v) are expressed in logs in the regressions. Measure (v) is a more indirect proxy for productivity as it relies on the stylized fact that large firms are more productive. Output (operating revenue), gross value added and cost of employees are converted in real terms using the relevant industry specific deflators (at the two-digit NACE 2 level) from ISTAT. Table 3 reports summary statistics for the different productivity measures.

Table 3.

Italy: Measures of Firm Productivity—Summary Statistics, 2007

article image
Note: The reported summary statistics are based on data excluding the top and bottom 2 percent so as to avoid distortions from extreme outliers. Return on assets is defined as earnings before interest and tax over total assets. All variables (operating revenue, gross value added and costs of employees) are deflated using the relevant industry specific deflator at the NACE 2-digit sector level from ISTAT.

C. Results

Baseline

14. We find strong evidence that public sector efficiency raises firm productivity. To build the intuition for our empirical strategy, Table 4 reports the coefficient on our government efficiency measure, when it is included linearly in equation (1), without the interaction with sectoral government dependence (i.e., the single difference).8 Columns (1) and (4) contain the estimated coefficient for output per euro spent on employees and gross value added spent on employees for all firms in our sample. Columns (2) and (5) are based only on firms in construction—one of the most government dependent sectors, while columns (3) and (6) include only firms in the basic metals industry, one of the least dependent on the government. As expected, firm productivity tends to be higher on average in provinces with more efficient public spending (columns 1 and 4). However, the positive correlation is much larger for firms in construction, relative to basic metals, a pattern we would expect if indeed there was a causal relationship between public sector efficiency and firm productivity. Table 5 reports the estimated coefficients on the interaction between public sector efficiency and government dependence from equation (1) for various measures of firm productivity. Across all measures of productivity, the estimated coefficient is positive and statistically different from zero, implying that public sector inefficiency holds back labor productivity.9

Table 4.

Italy: Correlation between Public Sector Efficiency and Firm Productivity

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Note: All regressions include firm class size dummies. Columns (1) and (4) control for industry fixed effects at the 4 digit NACE Rev 2 level. Standard errors are corrected for heteroskedasticity and clustered at the province level.
Table 5.

Italy: Effect of Public Sector Efficiency on Firm Productivity

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Note: All regressions include province and industry fixed effects, and control for firm size category. Robust standard errors clustered at the province level.

15. The economic magnitude of the causal impact of government efficiency on productivity is nontrivial. A firm in the electrical equipment sector (which is just below the upper quartile of dependence on the public sector) in a province in the upper quartile of public efficiency produces 13 percent more output per euro spent on salaries than the same firm in a province in the lower quartile of public efficiency. The equivalent figure for gross value added per euro spent on salaries is 5.8 percent, for output is 4.5 percent, output per worker 11 percent, and value added per worker 4.2 percent. Finally, its return on assets is 25bps higher than the equivalent firm in a province with public sector efficiency at the 25th percentile.

16. Alternatively, for a firm in a sector above median dependence on government, being in a province with above median public efficiency increases output per euro spent on salaries by 11.3 percent. This simplified presentation of the results, reported in Table 6, follows from estimating equation (1) with dependence on government and public sector efficiency coded as dummies taking the value of one if the sector/province is above the median government dependence and public sector efficiency respectively. Being in above median province in terms of public efficiency, also raises gross value added per euro spent on employees, output and return on asset by 4.3 percent, 8.6 percent, and 50bps respectively for the average firm in a sector with above median government dependence.

Table 6.

Italy: Effect of Public Sector Efficiency on Firm Productivity: Alternative presentation

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Note: All regressions include province and industry fixed effects, and control for firm size category. Robust standard errors clustered at the province level.

Robustness

17. The results are robust to several modifications of the baseline empirical approach (Appendix Table A1).

  • In the baseline estimation, we use firm level data from 2007, which most closely matches the time for which public sector efficiency is measured at the province level. Using firm data for 2008, 2009, or 2010 does not alter the findings (public sector efficiency is still measured in 2007, a reasonable assumption in the absence of major reforms of the public administration). In fact, the significance of the results for output in levels is stronger (Panels A–C).

  • Results are generally robust to an alternative measure of dependence on government based on the percent of sectoral output sold to the public sector (Panel D). In order to preserve the exogeneity of the dependence measure, we use the input-output table for Germany, a country where the public sector is fairly efficient, to calculate the share of output sold to the private sector.

  • We find similar effects if we compute our measure of public sector efficiency at the regional level, which might help reduce potential measurement error if firms’ inputs and/or interactions with the government are not restricted to the province but to the broader region in which the firm is located (Panel E).

  • The findings are also robust to an alternative proxy for government quality. Instead of public sector efficiency, we use the effectiveness of government as captured in the European Quality of Governance Index at the region level (see Figure 3). This index, available for 2010 and 2013, is based on a large survey of citizens’ perception of the quality, impartiality and level of corruption of three public services (education, health, and law enforcement), combined with the World Bank Doing Business Indicators (see Charron, Lapuente, and Dijkstra, 2014, for details about the index). In Panel F, we replicate our cross-sectional specification (equation 1) with data for 2010, but we replace the provincial public sector efficiency score with the regional quality of governance index. In Panel G, we take advantage of the time series dimension of the data, and examine whether firm productivity rose relatively more in regions where quality of governance improved relatively more between 2010 and 2013.10 Both in the cross-section and in the time-series, we find evidence that government ineffectiveness constrains firm productivity. The time series findings make a particularly compelling case for the causal impact of government effectiveness on firm productivity.

  • ORBIS provides a unique database to study Italy’s firms, but its representativeness of certain types of firm (such as smaller or younger firms or firms in the service sector) may be an issue. Indeed, while the database contains virtually all of the establishments classified as large or medium, only 15 percent of the small and medium enterprises are included in the data. As a robustness check, we follow Gal (2013) and apply re-sampling weights, based on the number of enterprises in each (industry-size) class cell, which essentially scale-up the number of ORBIS observations in each cell so that they match the number in the population.11 The weighted regression yield even stronger estimates of the effect of public sector efficiency on firm productivity (Panel H).

  • The results are also not affected by a number of additional robustness checks such as the inclusion of more firm-level controls (leverage, share of tangible assets in total assets, firm age – results available upon request), and controlling for firm size X four-digit sector fixed effects (resulting in about 3,300 sector-firm-size categories, Panel I).

Government Inefficiency, Firm Type, and Level of Government

18. The effects of public sector efficiency on productivity are stronger for certain types of firms. Table 7 estimates equation (1) for the subsamples of firms incorporated before and after 2005; as well as micro, small, medium, and large firms. The effects of public inefficiency are larger for young firms. This finding is intuitive since young firms are more likely to interact with the public sector to obtain permits and certifications. With regards to firm size, public sector inefficiency seems to be a bigger constraint for the smallest firms (micro establishments with less than 10 employees), and the largest firms (establishments with more than 250 workers). This finding is consistent with the importance of the public sector for young firms, as well as very large firms, which tend to be more heavily regulated (for example, many labor laws apply only for firms with more than 15 employees).

Table 7.

Italy: Firm Type and the Effect of Public Sector Efficiency on Productivity

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Note: Young companies are defined as those incorporated since 2005. Micro firms are those with 1-9 wokers, Small with 10-49 workers, Medium with 50-249 workers, and Large are firms with more than 250 workers. All regressions include province and industry fixed effects, and control for firm size category. Robust standard errors clustered at the province level.

19. There is some evidence that the efficiency of the central government matters more for firms. As mentioned above, three of the services included in the average public sector efficiency variable are provided by local or regional governments (health, child care, and waste collection). Education is provided by the central government and civil justice is provided by the judiciary as an independent branch of power. We calculate the average efficiency scores for services provided by the central and regional/local governments and interact these separately with the dependence of industries on the public sector. The results from estimating the modified version of equation (1) are in Table 8 and suggest that the effects of improving the efficiency of education and justice may in some cases be up to twice as large as the effects of improving decentralized services.

Table 8.

Italy: Level of Government and the Effect of Public Sector Efficiency on Productivity

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Note: Locally provided services include child care, waste collection and health. Centrally provided services include education and civil justice. All regressions include province and industry fixed effects, and control for firm size category. Robust standard errors clustered at the province level.

D. Conclusions and Policy Implications

20. Significant macroeconomic productivity gains could be realized if public sector efficiency improved from currently low levels. The analysis in this paper establishes a causal link between public sector efficiency at the provincial level and firm productivity using a rich dataset containing information for about 450,000 Italian firms. The quantitative estimates imply that if public sector efficiency rose to the frontier in all provinces, productivity measured as output per euro spent on salaries could increase by up to 22 percent in the sectors that depend the most on the public sector, while gross value added per employee costs could rise from 2 to 10 percent. For the average firm, output would expand by 3 percent.

21. The impact of increasing public sector efficiency could be potentially much more sizable than the gains from raising local financial development. Several studies have documented the importance of local financial development for growth and productivity in the context of Italy (e.g., Guiso, Sapienza, and Zingales, 2004; D’Alfonso, 2004; and Barra, Destefanis, and Lavadera, 2013). We compare the gains from raising public sector efficiency to those of raising local financial development by estimating equation (1) but substituting government dependence with a measure of dependence on external finance for each sector and government efficiency with financial development. We then compute the increase in firm labor productivity if financial development were to rise to that of the most financially developed province.12 Figure 6 presents the findings for both public sector efficiency and financial development. The dividends from raising public sector efficiency appear to be substantially larger.

Figure 6.
Figure 6.

Italy: Gains from Raising Public Sector Efficiency and Financial Development

Citation: IMF Staff Country Reports 2015, 167; 10.5089/9781513559681.002.A001

22. Our findings argue for reforming public service to increase the efficiency of government spending. Given that various levels of government are responsible for the provision of different public services, a comprehensive reform would aim at improving efficiency of all levels of government. Accelerating the legislation and implementation of the public adminstration reform agenda, implementing the recommendations of the 2014 spending review and competition authority (Autorità Garante della Concorrenza e del Mercato, 2014) would be important steps in the right direction and could help deliver some of the gains identified in this paper.13

Local Public Services

  • Rationalization of local public enterprises. In many areas, the provision of local services (e.g., public transport, water supply, waste management, etc.) is dominated by monopolies assigned to companies directly owned by or related to local governments. The existence of more than 8,000 local public enterprises has been highlighted as a source of inefficiency, and a burden on public finances. The Report on the Commissioner for the Spending Review identified options to reduce the number of local public companies to less than 1,000 within three years to improve efficiency and exploit economies of scale. Efficiency gains would also follow from the use of standard costs to determine the size of transfers. The Competition Authority provided specific proposals to enhance competition in local transport and waste collection. Implementing these reforms swiftly would result in fiscal savings and a more growth-friendly public sector.

  • Privatization. Accelerating privatization could improve the quality of services, especially at the local level. At the same time, it would reduce macroeconomic vulnerabilities related to high public debt.

  • Public tenders. Public tenders for the provision of local public services are required, and the Competition Authority has been given the power to question actions by local authorities. However, data on contract award procedures suggest that the majority of contracts is still done through “in-house” awards or similar procedures (European Commission, 2015, and Anti-Corruption Authority).

Public Administration Reform

  • Performance-based budgeting. As noted in SM/14/261, a large array of performance indicators are collected at the central level but are not used often enough in the executive phase of budget preparation. Result indicators, primarily on outputs, should take a larger role and local authorities should be encouraged to adopt performance-budgeting arrangements too.

  • Management of human resources. Increased autonomy and accountability of public-sector managers, improved mobility of workers and wage differentiation across agencies and geographical areas could deliver efficiency gains.

  • Organizational structure. Review organizational structure to avoid duplication and exploit economies of scale.

Judicial Reform

  • Despite incremental reforms, the judicial system remains highly inefficient. IMF (2014) and Esposito, Lanau, and Pompe (2013) outline several recommendations to reduce these inefficiency, such as (i) rationalizing the type of cases that reach the Supreme Court; (ii) use of ad hoc measures to reduce the backlog of pending cases; (iii) promoting the use of out-of-court case resolution, both for corporate and household debt; and (iv) developing court performance indicatiors (in line with CEPEJ best practices).

Appendix. Effect of Public Efficiency of Firm Productivity: Robustness

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Note: All regressions (except in Panel G) include province and industry fixed effects, and control for firm size category. Regressions in Panel G include data from 2010 and 2013, and include firm and year fixed effects, as well as the regional quality of government index, which varies by region and year. Standard errors in panel G are clustered at the firm level. In the rest of the panels, standard errors are clustered at the province level.

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1

Prepared by Sergi Lanau and Petia Topalova. This selected issues paper is based on a forthcoming working paper with Raffaela Giordano and Pietro Tommasino at the Bank of Italy.

2

Pellegrino and Zingales (2014) do not find evidence that government inefficiency constrains productivity growth. However, their study, which relies on cross-country variation, faces the potential problems of limited data comparability across countries, small sample sizes, and higher likelihood of omitted variables. Amici et. al. (2015) find that the measures taken in 2008 and 2010 to simplify the process to start a business in Italy increased the corporate birth rate.

3

In Italy, a province is an administrative unit between municipalities and regions. Italy is divided into roughly 20 regions, 100 provinces, and 8,100 municipalities.

4

Regional disparity in per capita GDP is much more pronounced, with per capita GDP in the North almost double that of the South of Italy. This is largely explained by differences in employment and participation rates. Productivity differentials, as measured by gross value added per euro spent on employees, in national accounts data are of similar magnitude to the ones we uncover in the firm level data.

5

A large literature has documented that large firms are more productive (e.g., Idson and Oi, 1999).

6

For a full description of the methodology, data and estimation strategy, see Giordano and Tommasino (2011).

7

In 2012, more than 99.9 percent of businesses employed fewer than 50 people. These businesses accounted for 70 percent of value added and 54 percent of overall employment in Italy (ISTAT, 2014).

8

More specifically, we estimate: Yisp = β * GovEffp + γ Xisp+αs+εisp.

9

The drag on productivity from the inefficient provision of public goods adds to the disadvantages faced by firms in relatively inefficient regions. Limited geographical differentiation in nominal public sector wages and downward private sector wage rigidity due to competition with the public sector and a centralized wage bargaining system prevent firms from adjusting wages to fully accommodate the lower labor productivity.

10

In particular we estimate: Yispt = β * GovEffrt * GovDeps + δ * GovEffrt + αt + αi + εispt where αt are year fixed ffects while αi are firm fixed effects.

11

This method of resampling implicitly assumes that firms in ORBIS within a specific industry and industry class size cell are representative of the true population within that cell. However, we cannot correct for potential selection bias from differential propensity of reporting by firms based on other characteristics (e.g., profitability, age etc.) and our findings should be interpreted in light of this analytical shortcoming.

12

A sector’s dependence on external finance is from Tong and Wei (2011), which build on the methodology first developed by Rajan and Zingales (1998). Specifically, financial dependence of a sector is constructed as the difference of the capital expenditures of the sector and its cash flow as a share of its total capital expenditures in the 1990–2006 period in the U.S. Financial development at the province level is proxied by the log of outstanding credit per capita.

13

See Bank of Italy (2015) and the references therein for a discussion of public administration reforms, including coordination among different levels of government, staffing, performance measurement, and ICT adoption. Rizzica (2015) studies the effects of temporary contracts in the public sector.

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Cover IMF Staff Country Reports
Italy: Selected Issues
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 167
Publisher:
International Monetary Fund
ISBN:
9781513559681
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781513559681.002
Figure 1.

Italy: Evolution of Aggregate Productivity
Figure 2.

Italy: Measures of Government Efficiency
Figure 3.

Italy: Regional Variation in Government Efficiency in Italy
Figure 4.

Italy: Public Sector Efficiency and Firm Labor Productivity at the Province Level
Figure 5.

Italy: Sectoral Dependence on the Government
Figure 6.

Italy: Gains from Raising Public Sector Efficiency and Financial Development