There is evidence that productive firms in developing countries like India, China, and Mexico do not expand as rapidly as their US counterparts due to a mix of financial -specially for smaller firms- and organizational factors -mainly in larger firms- (Bartelsman, et al., 2009, Hsieh and Klenow, 2009), misallocation of resources, among other frictions that are correlated with weaker governmental institutions, measured by contract enforcement, crime, and corruption (Bloom et al., 2022; Acemoglu and Dell, 2015; Acemoglu and De Feo, 2022). I provide a rationale of the relationship between governments and firms describing it as game where resources allocation is determined simultaneously, explaining low productivity as an outcome of misallocation in both private and public sectors. We use local-level data from Mexico (a federation, as Argentina and Brazil) to validate results obtained from the model.