Working Paper: NBER ID: w18650
Authors: Laura Alfaro; Anusha Chari
Abstract: This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm-size dynamics and the reallocation of resources within industries over time. Following deregulation, we find that the extent of resource misallocation declines and a considerable thickening of the left-hand tail of the firm-size distribution suggesting a significant increase in the number of small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The size distribution we observe--namely, a large number of small firms and a small number of large firms--can be characterized as the "missing middle" in Indian manufacturing and suggests that small firms may continue to face constraints in their attempts to grow.
Keywords: Deregulation; Resource Misallocation; Firm Size Dynamics; India
JEL Codes: F43; G31; G38; L10; O12; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deregulation (L51) | reduction in resource misallocation (D61) |
| Deregulation (L51) | increase in number of small firms (M13) |
| Deregulation (L51) | growth of large firms (L25) |
| Deregulation (L51) | decline in Herfindahl index (L49) |
| Deregulation (L51) | changes in firm size distribution (L25) |
| Deregulation (L51) | nonlinear effects on firm size quantiles (C22) |