Sorting of Heterogeneous Firms and the North-South Divide in Italy

In this paper, we investigate the process of entry and exit of Italian manufacturing firms in relationship with characteristics of Italian provinces, at the NUTS 3-digit, with a focus on the productivity distributions of incumbent firms. We find a higher churning of firms, both entry and exit, in bigger and more productive provinces. After entry, firms show a higher productivity premium where already more productive firms are. Our findings are consistent with recent theories predicting an endogenous sorting of heterogeneous firms over space. In provinces where average productivity is lower, firm-level distributions are also more dispersed, probably due to a looser selection process at the local level. When we consider the historical geographic divide of the country, we estimate less than half the probability that a new firm is born in the South, where a representative firm is already about 28% less productive than in the North of the country. Results are robust to different industrial specialization patterns. Our findings point to a process of self-reinforcing divergence in productivity that exacerbates initial geographical disparities