Misallocation, Access to Finance, and Public Credit: Firm-Level Evidence

Using a database of 23,000 firms in 45 economies, we test the quantitative

importance of access to finance and access to public and private credit for the

determination of misallocation. We first derive measures of factor market and

size distortions, and then use these measures within a regression framework to

test the significance of self-declared access-to-finance obstacles as well as the

effect of access to a credit line issued by either a government-owned or private

bank. We find that access-to-finance obstacles and private credit increase the

dispersion of distortions. Public credit has a very small effect. For firms that do

not face financial obstacles, public credit increases the dispersion of distortions;

for firms that face financial obstacles, it slightly decreases dispersion. Public

credit does not appear to compensate for the distortions that exist in private

credit markets. Quantitatively, however, financial variables explain a very small

part of the dispersion of factor market and size distortions.