Starting in the early 1990s, countries in southern Europe experienced low productivity
growth alongside declining real interest rates. We use data for manufacturing
firms in Spain between 1999 and 2012 to document a significant increase in the dispersion
of the return to capital across firms, a stable dispersion of the return to labor, and
a significant increase in productivity losses from capital misallocation over time. We
develop a model with size-dependent financial frictions that is consistent with important