Total factor productivity heterogeneity: channelling the impact of institutions

This paper aims to contribute to the debate on the determinants of differentials in firms’ productivity. We test the hypothesis that macro factors, especially the quality of local institutions, play a role in explaining firm productivity in Italy. To this end, following Fӓre et al. (1994), we decompose the Malmquist index of total factor productivity (TFP) change for approximately 7,500 manufacturing small and medium-sized firms, and we proxy province- level institutional quality using the IQI index (Nifo and Vecchione, 2014). The results of our estimations suggest that better local institutions might help firms better combine inputs, approach the optimal size, and ultimately be more productive.