In most advanced economies productivity growth has
been hampered by barriers that allow zombie firms to survive. We examine the
effectiveness of institutional reforms in Portugal that were aimed to improve
efficiency in insolvency framework. Estimates show that reallocation barriers
declined. The reforms appear to have larger and more effective results in
zombie recovery than in exit. Firm size plays a major role in tackling
zombie-entrenchment. The decline in barriers has also implied a lower
distortion in the economy-wide selection process. The new setting seems to be
more desirable than forcing zombie exit at all costs.
Insolvency regimes; Zombie firms; Productivity; Reallocation barriers; Firm exit; Restructuring.
