Working Paper: NBER ID: w19966
Authors: Changtai Hsieh; Benjamin A. Olken
Abstract: Although a large literature seeks to explain the "missing middle" of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no "missing middle" in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
Keywords: firm size distribution; missing middle; economic development; microdata
JEL Codes: E23; H25; O11; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| no missing middle in the firm size distribution (L25) | smooth decline in the fraction of firms as size increases (L25) |
| larger firms exhibit higher average products of labor and capital (D29) | smaller firms are constrained by high marginal costs of capital (D22) |
| no significant bunching of firms around thresholds (L19) | missing middle due to regulatory burdens is not substantial enough (K29) |
| misconceptions about the missing middle arise from arbitrary transformations of data (C60) | focus on employment shares rather than firm sizes directly (L25) |