Legality rating and corporate efficiency: evidence from a conditional nonparametric frontier analysis

Abstract

Promoting legality and productivity is a central issue in modern economies. In this paper, we investigate the implications of a public policy that aims at achieving these goals through the adoption of the so-called legality rating (LR). The latter reduces corporate risk uncertainty by abating asymmetric information between companies that use good legal, fiscal and ethical practices and the credit system. We match companies whose legal and ethical practices have been certified by the Italian government—through the assignment of the LR—with a sample of unrated firms, and apply recent advances in nonparametric frontier analysis to assess the economic performance. We highlight a positive relationship between legality rating and firms’ production efficiency. Our findings also show that legality rating policy is an effective tool to enhance inter-regional technological catching-up of businesses.