A Lost Productivity Potential? Firm-Level Evidence on Measuring Misallocation in the German Manufacturing Sector (2014-2022)

Abstract

This thesis investigates the development and determinants of allocative efficiency in the German manufacturing sector from 2014 to 2022. The primary objective is to quantify the extent and dynamics of factor misallocation and assess its consequences for productivity. To achieve this, harmonized firm-level data from the JANIS microdata panel of the Deutsche Bundesbank are combined with national accounts from the German Federal Office of Statistics. The analysis employs three complementary approaches: the misallocation framework of Hsieh & Klenow (2009), the Olley–Pakes (1996) decomposition, and input-specific markup estimation following Raval (2023). The results demonstrate a marked increase in revenue-based total factor productivity (TFP) dispersion—particularly for the marginal revenue product of capital and labour—since 2017, with a sharp spike during the COVID-19 pandemic. Concurrently, the correlation between firm productivity and market share has weakened, signaling a decline in the effectiveness of reallocative productivity gains. Input-specific markup estimates further indicate that the pandemic has distorted not only capital markets but also labour and material markets. These findings underscore the need for targeted economic policy measures to reduce input-specific misallocation and to strengthen the reallocation of productive resources. Overall, the thesis contributes empirical evidence to the literature on misallocation and informs the ongoing debate on evidence-based industrial policy in Germany, that there is indeed a lost productivity potential.