Productivity, markups, and reallocation: evidence from French manufacturing firms

Abstract This paper investigates the evolution of aggregate productivity and markups among French manufacturing firms between 1994 and 2016, by focusing on the role of reallocation with respect to both aggregate measures. The reallocation of output to high-markup firms is often accompanied by the reallocation to high-productivity firms, which increases the aggregate of both markups and productivity. In this case, negative effects of markups, as a source of misallocation and welfare reduction, are mitigated by higher allocative efficiency. Instead, if aggregate markups rise without reallocation toward high-productivity firms, the economy takes larger damages. As a key finding, the study shows that before 2000 both aggregate productivity and markups increase by the reallocation of sales shares toward high-productivity and high-markup firms. Post-2000, instead, the contribution of reallocation to aggregate productivity becomes negligible, inducing a slowdown in aggregate productivity growth, while I measure persistent reallocation of sales shares from lower to higher markup firms. This has important policy implications, which are discussed in the paper.