Working Paper: CEPR ID: DP15134
Authors: Vittorio Bassi; Raffaela Muoio; Tommaso Porzio; Ritwika Sen; Esau Tugume
Abstract: Technology is often embodied in expensive and indivisible capital goods. As a result, the small scale of firms in developing countries could hinder investment and productivity. This paper argues that market interactions between small firms can alleviate this concern. We design and implement a survey of manufacturing firms in Uganda, which uncovers an active rental market for large machines among small firms. We then build an equilibrium model of firm behavior and estimate it with our data. The model shows that the rental market is quantitatively important for mechanization and productivity since it mitigates imperfections in other markets. The estimated transaction costs in the rental market are relatively small, which motivates us to redefine firm boundaries as a group of workers sharing the same machines. Doing so, the average firm size in our data increases by 77%. We conclude that through the rental market small firms achieve scale collectively.
Keywords: technology adoption; capital indivisibility; firm clusters; rental market; firm size distribution
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rental market for large machines (R31) | Overcoming barriers posed by capital indivisibility (D29) |
| Rental market for large machines (R31) | Increased mechanization (L64) |
| Rental market for large machines (R31) | Increased productivity (O49) |
| Rental market for large machines (R31) | Increased output (E23) |
| Redefined firm boundaries (L29) | Increase in average firm size (L25) |
| Lower transaction costs (D23) | Enhanced benefits from shared machine usage (D16) |
| Rental market (R31) | Efficient capital reallocation among firms (D25) |