Allocative Efficiency, Plant Dynamics and Regional Productivity: Evidence from Germany

The productivity gap between East and West Germany is a long ongoing discussion among the public and policy makers. Regional disparities still appear to be substantial. In this paper, we shed light on the role of allocative efficiency as a region’s driver of productivity disparities. We show that over 50 percent of the East-West productivity gap is associated with a less efficient labor allocation in former East Germany. Controlling for the heterogeneity among German federal states, we perform spatial regression on official firm-level data (AFiD), revealing that the regional differences in allocative efficiency are significantly associated with trade openness, competitive intensity, economies of scale and labor mobility.