The impact of firm-level Covid rescue policies on productivity growth and reallocation

We evaluate the impact of Covid-19 rescue policies on both firm-level and aggregate productivity growth, exit, and creative destruction. Using administrative data on the universe of firms’ support mechanisms in Flanders over 2019–2021, we first estimate the causal impact of this support program on firm-level outcomes. Firms that received support saw a 4%–5% increase in productivity, compared to similar firms that applied for, but did not obtain support. The productivity premium effect is temporary however: by the last quarter of 2021, treated firms are indistinguishable from untreated firms. Support measures also drastically reduced firm failure. The propensity to exit the market was 45% lower for treated firms, and if no support would have been issued, aggregate firm exit would have increased by 9%. We decompose aggregate productivity growth, a share-weighted average of firms’ productivity growth rates, into several components. Within firms over time, both treated and untreated firms contribute positively to aggregate productivity growth. There are signs of insufficient creative destruction on both the extensive margin (firm entry and exit) and intensive margin (reallocation of market shares to more productive firms) during the crisis. However, insufficient reallocation was already present well before the crisis, and there is no evidence that this inefficiency is driven by the contribution of treated firms in particular. Firm-level support measures helped firms to avoid exit, and to temporarily increase productivity, while not altering the ongoing process of creative destruction in the aggregate.