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Recessions can have a cleansing effect by encouraging the reallocation of resources from low-productivity firms towards higher-productivity ones. Whether this effect actually occurs is still debated. We contribute to answering this question by providing new evidence. Using a survey of firms matched with administrative data, we trace out the Covid-19 recession's effects across the productivity distribution. Higher-productivity firms are found to have been more successful at maintaining employment, but there was not a rise in exit amongst lower-productivity firms. In line with the theory that support policies offset the cleansing effect of recessions, high-productivity firms are also found to have been less likely to take up government support.
- Cleansing effect
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1/01/20 → 31/12/23