Weak Productivity: The Role of Financial Factors and

Policies

Luigi Zingales

University of Chicago

Stagnant Productivity Growth

© Zingales

3

Labor Productivity Growth 1995-06

-10%

0%

10%

20%

30%

40%

50%

TFP ICT Capital

Non-ICT Capital Labor Composition

Labor Productivity

Possible causes

1. Lower employment to pop or # hours worked

2. Lower technological innovation – We have picked the low hanging fruits (Gordon,

2016)

– Aging affects innovativeness

3. Worse transmission/application of innovation

4. Lower capital investments

5. Worse misallocation of investments or resources in general

Labor Participation Declining

© Zingales

© Zingales

The Role of the Financial Sector

• Little to do with 1 and 2 (Bell Lab)

• A lot to do with 3- 5

Roles of the financial system:

1. Transfer funds

2. Allocate funds to firms

3. Help govern firms

Outline

1. How did the financial system perform?

2. What are possible causes of the slowdown?

3. Can this performance have lead to the

slowdown in productivity?

4. What can we do about it?

1

Performance of the financial system

Growth of Financial Services

10

Source: Greenwood and Scharfstein (2013)

Growth in Intermediation

Source: Greenwood and Scharfstein (2013)

Housing Investments

The Growth in The Securities Industry

Source: Greenwood and Scharfstein (2013)

$0

$50

$100

$150

$200

$250

$300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

$ B

illio

ns

Source: Private Equity Analyst, Steven N. Kaplan

Commitments to U.S. Private Equity Partnerships 1980 - 2014 (in $ billions)

Merger and Acquisitions

Source: Institute of Merger, Acquisitions and Alliances © Zingales

Conclusions So Far

• It is difficult to find a metric in which the financial

system did not do well

• This result leads to two possible conclusions

1. The financial system is not responsible for the

productivity slowdown

2. Our measures of “performance” are not appropriate

2

What are possible causes of the slowdown?

Lack of investments?

Gutiérrez and Philippon, 2016

Increase in Concentration - HHI Index

Source: Grullon, Larkin and Michaely (2017)

© Zingales

Evolution of Mark-Up

Loecker and Eeckhout (2017)

© Zingales

Effects of Mergers on Market Power

Blonigen and Pierce (2016) © Zingales

Blonigen and Pierce (2016) © Zingales

Investment and Concentration Global financings in SaaS

(value and volume)

Source: techcrunch.com

Decline in Entry

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

FirmsEntryandExitRates(in%)

EstablishmentEntryRate

EstablishmentExitRate

Source: Business Dynamics Statistics (US

Census) © Zingales

Number of U.S. IPOs Categorized by Pre-IPO Sales

Source: Gao, Ritter, and Zhu, 2013

Misallocation of Investments

• Gopinath et al (2017): Misallocation of capital in Southern Europe due to the euro

• Lenzu et al (2018): misallocation of capital and labor in Italy

• Blattner et al. (2018): misallocation of capital in Portugal due to bank capital requirements

Productivity and Management

• Bloom et al. (2012): American firms are better able to exploit ICT innovation than European firms

• Pellegrino and Zingales (2017): in countries where meritocratic management is more prevalent ICT investments have a stronger positive impact on TFP growth

ICT and Meritocracy

3

Has the financial system contributed to the slowdown in

productivity?

Credit Market

• The credit market moved from providing credit to firms to financing houses and consumption

• This Is not necessarily bad from a welfare perspective

• But it Is not conducive to growth

Favoring Collusion?

• Aryal et al. (2017): analysts’ communication favor capacity reduction in the airline industry

• Azar et al. (2017 a) : common ownership reduces competition in the airline industry

• Azar et al. (2017 b): common ownership reduces competition in the banking industry

• M&A favored concentration, higher prices, and lower investments

Source: Barkai (2017 © Zingales

Source: Barkai (2017 © Zingales

In Europe

• Combination of existing financial system + euro lead to large misallocation

• Euro banking + sovereign crisis had large additional costs in terms of lack of investments and growth in Southern Europe

• Lack of pressure for change of control

4

What Can Be Done?

What Can Be Done?

1. Antitrust enforcement

2. Redefinition of property rights on data

3. Ensuring that the flow of credit to small, new

firms, continues

4. Rethinking of corporate governance

5. Fixing the Euro