## **Table 1: Drivers** **<u>of Allocative Efficiency</u>**

<!-- Start of picture text --> Dependent Variable: Sector covariance between firm revenue productivity and value-added share<br>Structural/Policy Drivers: (1) (2) (3) (4) (5) (6) (7)<br>Job-to-job mobility 5.804 3.892<br>[0.115]*** [0.111]***<br>Non-Wage Labor Costs/Total Labor Costs -0.554 -0.42<br>[0.015]*** [0.015]***<br>Minimum Wage Incidence -1.289 -0.295<br>[0.030]*** [0.032]***<br>Access to Finance from Financial Institution 3.225 3.038<br>[0.021]*** [0.024]***<br>Zombie Firm Presence -0.140 -0.270<br>[0.020]*** [0.02]***<br>Product Market Concentration -0.444 -0.037<br>[0.022]*** [0.022]*<br>N 592 666 666 666 666 666 592<br><!-- End of picture text --> Source: INEC. Authors’ Elaboration. Note: This table reports the coefficient, μ�, of Equation (3)’s specification. Regressions are carried out at the ISIC 2-digit level of sector granularity. The following sector indicators of structural and/or policy drivers of misallocation are considered: job-to-job mobility, non-wage labor costs relative to total labor costs, minimum wage incidence, share of firms with access to credit from a financial institution, zombie firm presence, and product market concentration. Job-to-job mobility is measured as the ratio of workers in a sector that transitioned into other jobs between t−1 and t relative to the average, between t−1 and t, of total the number of workers in the same sector. The number of industry observations for specification (1) is lower given that one period is lost as a result of the job-to-job mobility definition. Non-wage labor costs relative to total labor costs measures how much of total labor costs are allocated towards employment costs that arise from mandated labor regulations instead of workers’ labor compensation. It is calculated as the sector average of firms’ ratio of nonwage labor costs to total labor costs. Total labor costs consist of wages plus social security contributions, severance pay costs, mandatory compulsory allowances (i.e., “thirteenth” and “fourteenth” salaries), compulsory worker participation in firms’ dividends, and other remunerations (i.e., transportation, commissions, bonuses, childcare). Non-wage labor costs include mandatory compulsory allowances (i.e., “thirteenth” and “fourteenth” salaries), compulsory worker participation in firms’ dividends, and other remunerations (i.e., transportation, commissions, bonuses, childcare). The minimum wage incidence is measured as the ratio between the mandated minimum wage and the sector median wage. Higher values of this ratio implies that the minimum wage is more binding for firms within the sector. The share of firms with access to credit from a financial institution is measured as the ratio of firms in a sector with a loan form a financial institution relative to the total number of firms in the sector. Zombie firm presence is measured as the share of zombie firms relative to the total number of firms in a sector. The product market concentration variable calculated using the sectors’ HHI. Each regression controls for industry and year fixed effects. Columns (1) – (6) consider only one regressor at a time, while column (7) includes all regressors within the specification. As Angrist and Pischke (2008), regressions weigh aggregate sectoral observations by the number of firm observations within industry-year.

# **6 “Missing Large” and “Missing Young” Firms in Ecuador**

This section discusses supportive evidence that the previously studied market distortions have also led to anemic firm size and firm age distributions in Ecuador. The distribution of firms by size in Ecuador remained stable for the sample period, as Figure 11 illustrates. Approximately 90.9 percent of formal firms in Ecuador are classified as micro firms, while small, medium, and large firms represent around 7.0, 1.7, and 0.4 percent, respectively.<sup>37</sup> Figure A 13 (left panel) displays the distribution of firms by size in the US. Although microenterprises still dominate, their contribution is more than 30 percentage points lower than that of Ecuador. Conversely, the share of large firms in the US is more than double that of Ecuador. Consequently, relative to the US, Ecuador exhibits an underrepresentation of large firms and an overrepresentation of microenterprises.

> 37 Considering the limitations of the data, Figure 11 depicts the distribution of only formal firms. Given that smaller employment levels are typically associated with informal productive units, it is expected that the concentration of firms in smaller size groups would be even higher for the total economy (formal plus informal enterprises).

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