Rising Firm-Level Inequality in Europe: The Role of Technology and Innovation

This paper investigates the impact of artificial intelligence (AI) adoption on firm performance in Europe, with a particular focus on distributional effects across the performance spectrum. Using a panel dataset of firms from 2000–2025 and employing panel quantile regression techniques with firm and time fixed effects, the study examines how AI influences productivity and performance heterogeneity. The results show that AI adoption has a positive and statistically significant effect on firm performance, but its impact is highly uneven across the distribution. Specifically, the magnitude of the AI effect increases monotonically from lower to upper quantiles, indicating that high-performing firms benefit disproportionately more from AI technologies than low-performing firms. This pattern remains robust across alternative performance measures, AI proxies, subsample analyses, and model specifications, including controls for innovation and interaction effects. Further evidence shows that innovation significantly amplifies the productivity gains from AI, particularly among top-performing firms, thereby reinforcing performance divergence. Cross-country analysis reveals heterogeneous but consistent patterns across European economies, with stronger effects in more advanced innovation systems. Overall, the findings highlight that AI is a key driver of technology-induced firm-level inequality and structural heterogeneity within European industries. JEL Classification : D22; D24; O33; O47; L25; C21