Drivers of regional efficiency differentials in Italy: Technical inefficiency or allocative distortions?

This paper estimates regional economic efficiency differentials at firm level for the Italian manufacturing sector in the period 1998-2003. We implement an input distance function approach providing measures of both technical inefficiency and allocative distortions in the choice of input mixes. Our results confirm the substantial technical efficiency gap suffered by firms located in Southern regions, thus providing empirical support for the “structural and technological gap” interpretation of Italian dualism. On the other hand, the allocative distortions in the use of inputs show less remarkable regional differences. In terms of policy, our results suggest the need for a re-allocation of public resources for development policies from business incentives to public investment.