Firms Flashcards
(18 cards)
What is missing middle?
Why does this exist?
- if you look at firm size distribution, they are either concentrated as large or as small. As there are increased costs involved when reporting as a large firm. Therefore, those firms at the margin will prefer to stay small.
What is a model that explains missing middle?
- Regulation and labour market policies encourage firms to stay intentionally small in order to not enter the informal sector.
What does Rauch (1991) say
What paper says about the type of firms in India
Most firms in India are small.
Hsieh and Olken (1994)
Show graphically that all firms are concentrated at the lower distribution.
- disproportionate number of firms are small
When investigated in India what is said about the missing middle?
Hsieh and Olken (2014) use data from Mexico, India and Indonesia.
- Find Unimodal not bimodal distributions.
- This contradicts the existence of a missing middle
- Attribute it to lack of enforcement
- Tybout (2014) argues that Hsieh and Olken (2014) argues that the bi-modality is taking the theory too literally.
- compares the distribution from the Hsieh and Olken (2014) and compares it to parteo distribution and finds evidence of missing middle in some asian countries.
What does Amirapu and Gechter (2017) study and finds?
Study the impact of labour regulation on indian firms.
- Using 2005 census data.
- Two thresholds firms with above 10 people and firms with above 100 people.
- Look for discontinuity in the firm distribution
Results: They find a little discontinuity at the 10 workers.
- The paper finds that the cutoff at 10
- 5% points shift
- if they move below 10 to above 100 cost will increase by 35%
- when moving below 100 to above 100 no difference.
What does Ulyseea (2018) say
- Using 3 models it models informality as both a survival strategy for low-productivity firms as an evasion strategy for some firms and a and surival for low productivity firms.
- Results show;
Smaller the firms higher the informality - extensive - a firm that is registered but the workers are not registered,
- when they are informal in intensive only half of the firms are informal.
What does informality depend on?
- informality depends on cost of production
- the nature of informality extensive margin.
What are the two main reasons behind missing middle? / duality / coexistence of formal informal
Access to capital / hetergenous
benefit Trade / heteregenous
What are the required readings for Firms?
Banerjee and Duflo (2014)
McCaig and Pavnik (2018)
What is Banerjee and Duflo (2014) trying to work out?
- What are the reasons against such free mobility of capital across sectors.
- Using natural experiment
Banks mandated to loan 40% of their credit to priority sectors - The ceiling went from 6.5 million to 30 million in 1998.
- It then increased to 10 million in 2000
(Exogenous shock to firm)
What did they did:
- See if credit contraction and expansion had a different effect on firms of different size.
- Is it impacting small and big firm differently, as if there is no friction it should have the same effect on small firms and large firms.
- Use non-priority sector as a placebo check
- Big is the dummy for big firm
- They look at the first expansion
- coefficient on first interaction is the effect of expansion
- Coefficient on second interaction is the effect of contraction
Results:
Second part:
They measure the output as outcome variable, capital stock change on then use an IV.
- Only take capital stock change in the IV.
- Results show:
- Large firms are credit constrained
- But smaller firms are more credit constrained
- Sales and profits went up in targeted firm
- IV much higher than OLS estimates
Why is free capital mobility relevant in missing middle?
- As if there is free capital mobility then even the informal sector can access capital which can help it to grow.
How do production functions show the missing middle?
- As firm 1 is at the start of the production function and cannot access capital as well, even though the marginal production is high.
-While firm 2 gets more capital but is already at diminishing returns.
- Therefore, it illustrates the duality as the firm in the informal sector cannot access the capital.
- if there is free movement of capital then the surplus capital in the formal sector can then move to the informal sector which removes the duality.
What other papers explain how capital can be a reason for duality?
For the trade argument what is the high level reason to why duality exists?
- Different access to markets between small and large firms.
- Trade is an instrument to access wider markets
What does the McCaig and Pavnik (2018) paper say
- Look at Vietnam access to US market from bilateral trade agreement in 2001
- DID looking at the tariff difference from before and after.
- Looks at the sectors that benefitted most and least from tariff
- As tariff changes more
- no observed reason attributable to tariff change
-Rules out endogeneity of tariff change - stylised fact shows that higher the tariff change and the higher the imports
Results:
Sectors that were impacted by the largest tariff change had lower household production
Therefore, the tariff shock reduces the amount producing household level and increases the firm level
SHOWS ACCESS TO MARKET CAUSES BARRIER TO FORMALITY!
TRADE IMPACTS INFORMAL TO FORMAL
ACTUAL RESULTS:
- Following the BTA: the share of manufacturing working in household business went down from 65% to 60%
- Placebo, changes in tariff do not predict employment trends prior to BTA
- it ignores the longer period effect
- Aggregate productivity gains of 2.8% a year.
Which area does duality / missing middle refer to?
- Refers to the urban sector
What is the benefit of trade to firms?
- Increases access to larger markets / higher income customers.
- increases competition
- Trade favours more productvie firms
