The Importance of Reallocation for Productivity Growth: Evidence from European and US Banking

This paper quantifies the effect of reallocation dynamics on aggregate productivity developments in the banking sectors of Europe and the United States. We document an increase in productivity over the period 1995-2009, on the order of 11 in the US and 19 in Europe. At an annual frequency, under-performing banks capture market share, while more productive banks lose market share, in particular in the US. The pattern of reallocation is markedly different between the geographical regions European productivity has grown by reallocating inputs through the first half of the sample, at the same time when reallocation diminished growth in the US. Within-firm growth has been rising steadily in both areas, largely due to technical change. The long- run positive effects of creative destruction are especially apparent in the US, where reallocation is an important driver of increases in aggregate productivity.