The research studies how distortions in input allocation can be measured by the firm-level gaps in the marginal revenue products of inputs and their user costs (MRP-cost gap). These gaps are measured for the universe of the Italian corporate sector, and are related to observable frictions in the labor and credit markets. The MRP-cost gaps are used to estimate the aggregate TFP gains from reallocation.
An optimal reallocation of resources may increase aggregate output by 6-8 percent. Larger gains may be obtained (i) during periods of financial instability, (ii) among non-manufacturing industries, (iii) in areas characterized by less developed institutions and (iv) among riskier firms. These results highlight a possible trade-off between output maximization and aggregate risk.