## Identifying Service Market Reform Priorities in Italy

_IMF Working Papers, February 21, 2020_

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**Canonical URL:** [Identifying Service Market Reform Priorities in Italy](https://www.imf.org/en/publications/wp/issues/2020/02/21/identifying-service-market-reform-priorities-in-italy-49038)

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## Bibliographic details
- Authors: Nazim Belhocine, Daniel Garcia-Macia
- Published: February 21, 2020
- Series: IMF Working Papers

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### Summary
- Italy’s labor productivity in market services has declined since 2000 and underperforms manufacturing and peer European countries, especially in strongly regulated sectors.
- A model of monopolistic competition is used to identify which service sectors would benefit more from removing entry and/or exit barriers.
- Using Italian firm-level data, the paper finds sectoral heterogeneity in reform gains:
  - Sectors with high markups, such as professional services, would primarily benefit from removing entry barriers.
  - Sectors with a large mass of unproductive firms, such as retail, would instead benefit from removing exit barriers.
- Policy recommendations to improve efficiency are outlined in relation to the sectoral priorities identified in the data.

### Methodology and Analytical Framework
- Analytical framework: a model of monopolistic competition calibrated to sectoral, firm-level Italian data.
- Empirical input: Italian firm-level data used to identify markups and distribution of firm productivity across service sectors.
- Focus: mapping sectors to reform type (entry liberalization versus easing exit) based on observed markups and mass of unproductive firms.

### Key Findings
- Labor productivity trends:
  - Decline in market services labor productivity since 2000.
  - Underperformance relative to manufacturing and peer European countries, concentrated in strongly regulated sectors.
- Sectoral reform priorities:
  - High-markup sectors (example: professional services): greater gains from removing entry barriers.
  - Sectors with many low-productivity firms (example: retail): greater gains from removing exit barriers.
- Efficiency drivers:
  - Entry liberalization can discipline markups and increase competitive pressure in sectors with entrenched pricing power.
  - Facilitating exit reallocates resources away from unproductive firms and raises aggregate productivity where a large mass of unproductive firms exists.

### Policy Recommendations (sector-focused)
- For high-markup sectors (e.g., professional services):
  - Prioritize removal of entry barriers to increase competition and reduce markups.
- For sectors with many unproductive firms (e.g., retail):
  - Prioritize easing exit barriers to allow reallocation of resources toward more productive firms.
- Tailor reform sequencing to sectoral characteristics revealed by firm-level data, balancing entry liberalization and exit facilitation according to where the dominant inefficiency (excess markups vs. mass of unproductive firms) lies.

*Identifying Service Market Reform Priorities in Italy — Nazim Belhocine and Daniel Garcia-Macia, February 21, 2020*

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/02/21/identifying-service-market-reform-priorities-in-italy-49038_