Firm-Level Input Distortion in Indian States
This paper measures trends in factor misallocation in India between 1999 and 2014, using data from a rich panel of Indian firms. The misallocation of a factor is modeled as an adjustment cost, that is, an implicit variable cost incurred by a firm when using that factor. Trends in the adjustment cost are estimated using a new adaptation of the firm-level cost-minimization approach. The paper documents these trends for four factors of production (permanent labor, contract labor, land, and fixed capital) across Indian states and by firm size. Overall, the findings show that adjustment costs declined over time for labor and land but with significant heterogeneity with respect to state growth rate and firm size. Using these stylized facts on trends in factor adjustment costs, as well as in-depth field interviews with firms in two Indian states, the paper also discusses potential policy developments behind these trends, including a preliminary examination of the role of state-level governance in the implementation of relevant factor market policies.
| Main Authors: | , , , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2022-05-17
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| Subjects: | MISALLOCATION, FIRMS, DISTORTIONS, LAND MARKET, LABOR MARKET, FACTOR MISALLOCATION, FIRM PERFORMANCE, COMPETITIVENESS, PRODUCTIVITY, REALLOCATION OF RESOURCES, RESOURCE ALLOCATION, NATIONAL LABOR POLICY, MANUFACTURING, LAND USE, |
| Online Access: | http://documents.worldbank.org/curated/en/099535305172211094/IDU03a5833790e14d04be0084b301c940b591efe http://hdl.handle.net/10986/37451 |
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| Summary: | This paper measures trends in factor
misallocation in India between 1999 and 2014, using data
from a rich panel of Indian firms. The misallocation of a
factor is modeled as an adjustment cost, that is, an
implicit variable cost incurred by a firm when using that
factor. Trends in the adjustment cost are estimated using a
new adaptation of the firm-level cost-minimization approach.
The paper documents these trends for four factors of
production (permanent labor, contract labor, land, and fixed
capital) across Indian states and by firm size. Overall, the
findings show that adjustment costs declined over time for
labor and land but with significant heterogeneity with
respect to state growth rate and firm size. Using these
stylized facts on trends in factor adjustment costs, as well
as in-depth field interviews with firms in two Indian
states, the paper also discusses potential policy
developments behind these trends, including a preliminary
examination of the role of state-level governance in the
implementation of relevant factor market policies. |
|---|