Presentation by Mauro Pisu, OECD at the OECD Workshop on Spatial Dimensions of Productivity, 28-29 March 2019, Bolzano. More info: https://oe.cd/GFPBolzano2019

1. THE EFFECT OF PUBLIC
ADMINISTRATION EFFICIENCY
ON FIRM-LEVEL PRODUCTIVITY:
EVIDENCE FROM ITALY
Milenko Fadic, Paula Garda and Mauro Pisu
Workshop on Spatial Dimensions of Productivity
28-29 March 2019, Bolzano, Italy

2. Low labour productivity is a structural problem
Fonte: OECD
 Italy’s long-term economic stagnation reflects its low labour
productivity growth
30
35
40
45
50
55
60
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
G7 Italy
USD, constant prices, 2010 PPPs

3.  Slow firm-level productivity growth and resource misallocation
 Large share of small and lowly productive firms
 Secular trends, such as population ageing
 Sectoral specialisation of manufacturing firms (competition
from low-cost countries)
 Low innovation and ICT use
 Lack of human capital and/or management knowhow (family
run firms)
Factors explaining the low productivity growth

4. Role of public administration efficiency on firms’ producitivty
 Indirect effect: firms have regular interactions with the public
administration  its inefficiencies represent a cost for the private
sector  negative effects on firms’ performance
 Related literature:
 Giacomelli and Menon (2016) “Does weak contract enforcement affect
firm size? Evidence from the neighbour’s court”
 Giordano et al (2015) “Does Public Sector Inefficiency Constrain Firm
Productivity: Evidence from Italian Provinces”
In this paper we focus on effect of public
administration efficiency

5. More efficient provinces tend to have
higher firm-level productivity

6. DATA

7.  The indicator: “Livelli quantitativi di prestazione” gauges the
efficiency of the local public administration; numerical ranking
from 1 to 10
 Sourced from :
• online portals managed by SOGE and Ministry of Finance
with information on local government operations
• data collection to implement fiscal federalism and set
transfers to local gov. based on needs (going beyond the
historical spending approach)
 It based on input and output measures
• Input: standard expenditure needs
• Output: standard level of services
Public administration efficiency indicator

8.  Standard expenditure needs and standard level of services
• estimated through cost and output regressions by SOGE
(municipal level data on geographic, socio-demographic, and
economic characteristics)
 The index is computed considering
• expenditure gap = actual exp - standard expenditure needs
• output gap = actual level of services - standard level of services
 We use indicators for 2013 and simple provincial average of
municipal level index (data available for 2010, methodology was
slightly different)
Public administration efficiency data

9. Reggio nell'Emilia Reggio di Calabria
€128,800,683 Historical spending €104,323,071
€757 Spending per capita €559
€131,361,769 Standard needs €124,245,705
-1.95%
Historical spending - Standard
needs
-16.03%
15.95%
Offered services - Standard
services
-22.70%
Livelli Quantitativi delle prestazioni
Efficiency (1-10)
Efficiency of the public administration (2010)

10.  Longitudinal firm-level data: ORBIS data-base for the period
2005-2013
 ORBIS representativeness:
Firma-level data: ORBIS data

11. METHODOLOGY

12.  Xijk are size and age of firm, provincial GDP per capita, 2
digit-industry dummies, regional dummies
Geographical discontinuity design
Efficiency
indicator at
provincial
level
Performance (in log) of
firm i, in province j and
in municipalities sharing
provincial border k
Border-group
dummies

13. Provincial boundaries create
a geographical discontinuity
Firms in municipalities
sharing provincial borders
and within the same region
belong to the same
economic area but are
subject to different public
administration efficiency
238 border groups in total
Geographical discontinuity design

14. Geographical discontinuity design

15.  Too many municipalities: estimation is infeasible, municipalities may
be too small
 Municipality-level spending is 5-6 times above provincial spending
(EUR 35 billion against EUR 6 billion in 2013)
Why aggregating municipal-level efficiency at
provincial level?

16.  Provinces have coordination role across municipalities; purely
administrative bodies
• technical-administrative assistance to municipalities;
• planning of transport services, construction and management of
provincial roads and traffic regulation in those roads;
• planning and management of waste disposal;
 A Shapley-based decomposition of R-squared (linear regression
of municipal public administration efficiency on a constant plus
provincial and regional fixed effects):
• Provinces explain 70% more of the variance of municipal public
administration efficiency than regional fixed effects.
The role of provinces in the public administration

17. RESULTS

18. Main results: positive impact
of public adm. efficiency
Average labour
productivity growth
Average value added
growth
Average
MFP growth
2005-2014 2011-2013 2005-2014 2011-2013 2005-2014 2011-2013
Efficiency 0.013*** 0.013** 0.011*** 0.015*** 0.002*** 0.001**
(0.004) (0.006) (0.004) (0.005) (0.001) (0.001)
Small (revenues<p35) -0.052*** -0.064*** -0.084*** -0.073*** -0.005*** -0.007***
(0.004) (0.006) (0.004) (0.006) (0.001) (0.001)
Medium (revenues>p35&<p70)) -0.008** -0.017*** -0.019*** -0.019*** -0.000 -0.001*
(0.004) (0.005) (0.004) (0.005) (0.001) (0.001)
Age (ln years) -0.082*** -0.083*** -0.111*** -0.117*** -0.008*** -0.008***
(0.004) (0.004) (0.005) (0.005) (0.000) (0.000)
Provincial GDP per capita -0.007 -0.002 -0.009** -0.003 -0.001* -0.000
(0.005) (0.005) (0.004) (0.005) (0.001) (0.001)
Constant 0.311*** 0.203*** 0.564*** 0.325*** 0.007 0.043***
(0.051) (0.049) (0.040) (0.029) (21.988) (0.004)
Border FE Yes Yes Yes Yes Yes Yes
Region FE Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
Observations 100,218 76,209 100,218 76,209 96,143 73,219
R-squared 0.030 0.031 0.053 0.056 0.019 0.021
Note:*** p<0.01, ** p<0.05, * p<0.1

19. Impact of raising public sector efficiency from the 25th percentile
(in Catanzaro, Calabria) to the 75th percentile (Monza, Lombardia)
Main results: large positive impact
of public adm. efficiency
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Labour productivity growth Value added growth MFP growth
% points

20. Effect is stronger for small than large firms
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
2 5 15 45 150
Number of employees
A. Labour productivity growth% pts
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
2 5 15 45 150
Number of employees
B. Value added growth% pts
Raising the local public administration efficiency from the 25th percentile of the
province-level distribution to the 75th percentile

21. Effect is stronger for old than young firms
0
1
2
3
4
5
6
7
3.5 12 35 75
Age of the firm
% points firm-level labour productivity growth

22. Different types type of services
Labour productivity growth
General administrative, management 0.019*** 0.019**
and control functions (0.005) (0.008)
Police 0.003 -0.003
(0.005) (0.007)
Education 0.003 0.003
(0.005) (0.004)
Public roads and transport 0.009** 0.006
(0.004) (0.006)
Land use and environment 0.012*** -0.000
(0.005) (0.004)
Social care 0.006 0.006
(0.007) (0.006)
Other controls and border FE YES YES YES YES YES YES YES
Observations 100,218 100,218 100,218 100,218 100,218 100,218 100,218
R-squared 0.030 0.030 0.030 0.030 0.030 0.030 0.030
Note: *** p<0.01, ** p<0.05, * p<0.1

23. Robustness checks: controlling for local economic
areas (e.g. industrial districts) and judicial districts
Issue: Local economic areas and judicial borders can overlap partially or
totally with provincial borders (Giacomelli and Menon (2016) find a
positive effect of efficiency of judicial courts on firm size)
Toscana Marche
Local economic areas Judicial districts

24. Economic areas encompassing a border group:
an example

25. Results are robust: controlling for local economic areas
Labour productivity growth
Baseline
Excluding provinces
whose borders
totally overlap with
that of local
economic areas
+ Including
dummies for
local
economic
areas
Only borders
within the same
economic areas
(4 borders)
Efficiency 0.013*** 0.013*** 0.015** 0.120**
(0.004) (0.005) (0.006) (0.047)
Small (revenues<p35) -0.052*** -0.052*** -0.052*** -0.044
(0.004) (0.004) (0.004) (0.029)
Medium
(revenues>p35&<p70) -0.008** -0.007* -0.007* -0.039**
(0.004) (0.004) (0.004) (0.011)
Age (ln years) -0.082*** -0.082*** -0.082*** -0.081***
(0.004) (0.004) (0.004) (0.010)
Provincial GDP per capita -0.007 -0.007 0.003 0.088**
(0.005) (0.005) (0.008) (0.032)
Constant 0.311*** 0.204*** -0.065 -0.878***
(0.051) (0.032) (0.051) (0.167)
Industry, region, border FE YES YES YES YES
Observations 100,218 98,292 98,292 1,760
R-squared 0.030 0.030 0.033 0.058

26. Results are robust: controlling for judicial districts
Labour productivity growth
Baseline
Excluding provinces
whose borders totally
overlap with that of
judicial districts
+ Including dummies
for judicial districts
Efficiency 0.013*** 0.013*** 0.015***
(0.004) (0.004) (0.005)
Small (revenues<p35) -0.052*** -0.052*** -0.052***
(0.004) (0.004) (0.004)
Medium
(revenues>p35&<p70)) -0.008** -0.008** -0.007*
(0.004) (0.004) (0.004)
Age (ln years) -0.082*** -0.082*** -0.082***
(0.004) (0.004) (0.004)
Provincial GDP per capita -0.007 -0.007 -0.022***
(0.005) (0.005) (0.005)
Constant 0.311*** 0.063 0.045
(0.051) (851.363) (0.028)
Industry, region, border FE YES YES YES
Observations 100,218 99,886 99,886
R-squared 0.030 0.030 0.031

27. Results are robust: controlling for local economic
areas and judicial districts
Labour productivity growth
Baseline
Excluding provinces
whose borders totally
overlap with that of
economic areas OR
judicial districts
+ Including dummies
for local economic
areas and judicial
districts
Efficiency 0.013*** 0.013*** 0.008**
(0.004) (0.005) (0.004)
Small (revenues<p35) -0.052*** -0.052*** -0.052***
(0.004) (0.004) (0.004)
Medium (revenues>p35&<p70)) -0.008** -0.007* -0.007*
(0.004) (0.004) (0.004)
Age (ln years) -0.082*** -0.082*** -0.082***
(0.004) (0.004) (0.004)
Provincial GDP per capita -0.007 -0.007 -0.017***
(0.005) (0.005) (0.005)
Constant 0.311*** 0.133*** 0.007
(0.051) (0.046) (34.254)
Industry, region, border FE YES YES YES
Observations 100,218 98,126 98,126
R-squared 0.030 0.030 0.033

28. Sorting of firms across provinces
• Issue: high-productivity growth firms in low-efficiency provinces
could move across the border to benefit from higher public
administration efficiency in bordering province (firms could just
move few kilometers and jump the border)
• Estimates using all firms and including
• high and low efficiency border dummies  the reference
category is municipalities with no provincial borders (inner-
province municipalities)
• or an interaction of efficiency with the border

29. No sorting of firms across provinces
Labour productivity growth
High efficiency border -0.001
(0.004)
Low efficiency border -0.006
(0.004)
Efficiency 0.001
(0.002)
Efficiency * border -0.001
(0.000)
Small (revenues<p35) -0.057*** -0.057***
(0.002) (0.002)
Medium (revenues>p35&<p70)) -0.010*** -0.010***
(0.002) (0.002)
Age (ln years) -0.084*** -0.084***
(0.003) (0.003)
Provincial GDP per capita 0.010*** 0.001
(0.003) (0.002)
Constant 0.214*** 0.160***
(0.017) (0.021)
Provincial FE YES
Industry FE YES YES
Regional FE YES
Observations 317,581 317,581
R-squared 0.030 0.030

30.  In Italy public administration inefficiency hinders firm-level
productivity and value added growth and to a lesser extent
multifactor productivity growth
 Effect stronger for smaller and older firms
 Tax collection and transport are the local public
administration services with the largest impact on firm-level
labour productivity growth
Conclusions