Working Paper: NBER ID: w27081
Authors: Stephie Fried; David Lagakos
Abstract: The lack of reliable electricity in the developing world is widely viewed by policymakers as a major constraint on firm productivity. Yet most empirical studies find modest short-run effects of power outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general equilibrium effects of power outages on productivity. The model captures the key features of how firms acquire electricity in the developing world, in particular the rationing of grid electricity and the possibility of self-generated electricity at higher cost. Power outages lower productivity in the model by creating idle resources, by depressing the scale of incumbent firms and by reducing entry of new firms. Consistent with the empirical literature, the model predicts that the short-run partial-equilibrium effects of eliminating outages are small. However, the long-run general-equilibrium effects are many times larger, supporting the view that eliminating outages is an important development objective.
Keywords: electricity; firm productivity; general equilibrium; developing countries
JEL Codes: E13; E23; O11; O41; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Power outages (L94) | Idle resources (Q30) |
| Idle resources (Q30) | Productivity (O49) |
| Power outages (L94) | Productivity (O49) |
| Eliminating outages (L94) | Output per worker (J54) |
| Eliminating outages (L94) | Long-run productivity increase (O49) |
| Higher aggregate capital per worker (E22) | Higher total factor productivity (TFP) (O49) |
| Higher total factor productivity (TFP) (O49) | Shift of production into the modern sector (O14) |