TY - JOUR AU - Gopinath, Gita AU - Kalemli-Ozcan, Sebnem AU - Karabarbounis, Loukas AU - Villegas-Sanchez, Carolina TI - Capital Allocation and Productivity in South Europe JF - National Bureau of Economic Research Working Paper Series VL - No. 21453 PY - 2015 Y2 - August 2015 DO - 10.3386/w21453 UR - http://www.nber.org/papers/w21453 L1 - http://www.nber.org/papers/w21453.pdf N1 - Author contact info: Gita Gopinath Department of Economics Harvard University 1875 Cambridge Street Littauer 206 Cambridge, MA 02138 Tel: 617/495-8161 Fax: 617/495-7730 E-Mail: gopinath@harvard.edu Ṣebnem Kalemli-Özcan Department of Economics University of Maryland Tydings Hall 4118D College Park, MD 20742-7211 Tel: 301/405-3266 E-Mail: kalemli@econ.umd.edu Loukas Karabarbounis University of Minnesota Department of Economics Hanson Hall Minneapolis, MN 55455 Tel: 612-204-5498 E-Mail: loukas@umn.edu Carolina Villegas-Sanchez Department of Economics, Finance and Accounting ESADE Business School Avenida de Torreblanca, 59 08172 Sant Cugat - Barcelona SPAIN SPAIN E-Mail: carolina.villegas@esade.edu M2 - featured in NBER digest on 2015-10-27 AB - Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that is consistent with important aspects of firms' behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a significant decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway. ER -