Inequality in Productivity: Geography and Finance of Leaders and Laggards in Italy

Abstract

We examine the geography of productivity leaders and laggards in the population of Italian joint stock manufacturing companies between 2007 and 2017 and analyse how far such patterns can be related to their financial structure and the provision of financial services in the Italian provinces. To do so we exploit the reform of the Italian banking system in the mid-Nineties as an exogenous shock on the structure of local banking markets and examine whether this shock affects productivity patterns at the firm level. We find a robust descriptive evidence of a widening of the leader-laggard gaps, with a very sizeable productivity divide between the North and the South of the country. Leaders are concentrated in the North. Leaders, especially in the North are also more likely to have access to capital markets. Firms in the South, instead, also those at the frontier, are more reliant on bank lending. The liberalization of the banking market in the mid 90s and the growth of joint stock banks at the provincial level positively affected firms’ productivity outcomes, possibly through an improvement of firms’ financial structure. We also use a firm specific measure of core-periphery based on distance from airport hubs and find that the likelihood of activating a virtuous capital market productivity link declines with distance from core areas.