Is larger really better? Productivity and firm size in European electricity generation sectors

Abstract

Although a conventional wisdom claims that larger firms perform better than smaller ones, the conclusions drawn by the literature are ambiguous. This study examines the effect of firm size on productivity, using a dataset on European electricity generators from 2012 to 2020. European electricity generation sectors are particularly interesting given the substantial liberalisations in the past decades and strong subsidisation of electricity generated from renewables. Next to estimating productivity of electricity generators and establishing a link between firm size and performance in this industry, the analysis allows for heterogeneity of impacts of firm size on productivity across various dimensions (e.g., regulation scheme, state ownership), as firm size may attenuate or fuel associated problems and benefits. Besides, it adds to the literature by investigating whether and how renewable subsidies impact reallocation from the technically less efficient to the more productive firms, since they often favour smaller generators in European countries that might be less productive. The overall results highlight that firm size significantly boosts firm performance. Effects, however, diminish with size. Last, renewable subsidies deteriorate allocative efficiency. Hence, renewable subsidies favouring smaller generators are at the cost of allocative efficiency.