PEDL Research Papers

Firms frequently engage in repeated trade despite the availability of alternative business partners. A large literature shows how such relationships aff ect market outcomes, but less is known about how changes in market structure a ffect these relationships. In this paper Ghani and Reed (2017) study a market for an intermediate input - ice - in which customers - fi shermen - are regularly loyal to retailers, who prioritize loyal customers for deliveries when supply is scarce from the monopolistic manufacturer. When entry of additional manufacturers reduces supply risk, retailers can no longer extract loyalty as a rent to abate the risk and switching between customers and retailers becomes more common. Retailers respond by expanding trade credit to customers, particularly previously loyal ones. The authors interpret this as evidence that supply risk and demand volatility can contribute to loyalty in relationships, particularly in developing countries. Further, they show that entry into ice manufacturing leads to substantial improvements in fishermen's productivity and reductions in the consumer price of fi sh, indicating that increased competition in low income economies can lead to improvements in productivity and welfare.
In this short paper, published in the American Economic Review, Atkin, Chaudhry, Chaudry, Khandelwal and Verhoogen (2015) directly asked firms about their mark-ups. Since 2011, they have been studying a cluster of soccer-ball manufacturers located in Sialkot, Pakistan and have learned a great deal about the ins and outs of producing soccer balls. In Atkin et al. (2014), the authors study the adoption of a new cost-saving technology that they invented and randomly introduced to a subset of firms. In conjunction with that study, they have directly collected information on prices and profitability, as well as the unit costs of manufacturing a standardized ball. Asking firms directly about their mark-ups is not a guarantee of accurate information. However, the facts that the producers use similar production techniques that the authors understand well and that they have been able to build up a modicum of trust with the firms over the course of our several-year project give them confidence that there is signal in the self-reported mark-ups. They have six main findings. First, dispersion in mark-ups is greater than dispersion in costs, at least in proportional terms. Second, both costs and mark-ups are positively related to firm size, arguably the best observable proxy for the entrepreneurial-ability parameter in many heterogeneous firm models (e.g. the”Melitz draw"). Third, the elasticity of mark-ups with respect to firm size is significantly greater than the elasticity of costs. Fourth, larger firms have greater costs primarily because they use higher-quality inputs (which are costly). Fifth, larger firms charge higher mark-ups on average both because they produce a greater share of higher-quality ball types, which carry higher mark-ups, and because they charge higher mark-ups for a given type of ball. Sixth, there is suggestive evidence that marketing efforts may play an important role is generating higher average mark-ups: mark-ups are more highly correlated with whether an entrepreneur attends an annual trade expo and sells to richer countries than with available measures of technical efficiency. In the conclusion the authors discuss what they consider to be the main implications of these findings for the theoretical and empirical work on heterogeneous firms.
Garlick, Orkin and Quinn (2017) run the first randomised controlled trial to compare microenterprise data from surveys of different frequency and medium. They randomly assign enterprises to monthly in-person, weekly in-person, or weekly phone panel surveys. Higher-frequency interviews have little effect on enterprise outcomes or reporting behaviour. They generate more data, capture short-term fluctuations, and may increase reporting accuracy. They result in lower response rates for each interview but do not increase permanent attrition from the panel. Conducting high-frequency interviews by phone, not in-person, lowers costs and has little effect on outcomes, attrition, or response rates, but induces slightly different reporting on some measures.
Kapteyn and Wah (2016) conducted a field study in the city of Yangon, Myanmar to investigate major obstacles to business development in the region. The analysis focuses on three aspects of the business environment that are considered to be top constraints among Myanmar small and medium enterprises (SMEs): (1) access to credit, (2) access to public services, and (3) access to electricity. The authors show respondents (all owners of SMEs) vignettes describing hypothetical businesses facing a particular difficulty, and ask the respondents to rate the gravity of the difficulty. The analysis of vignette ratings reveals that for access to credit, relaxing collateral requirements is considered of prime importance, while access to bank loans is seen as very problematic (equivalent to a 19 percentage points increase in the loan interest rate). Despite their widespread appeal to government officials, donor and business community, SME loans have no discernible impact on perceived access to credit. Access to public services is hampered by cumbersome and time consuming procedures, often necessitating daylong trips to the capital for administrative procedures. Improving such procedures would be equivalent with average annual savings equal to US $4,700 per business. Getting new electricity connections and unreliable electricity supply are perceived by our respondents to be the most difficult in getting access to electricity. As for SME growth, the authors find that growth is more concentrated among firms that have a business relationship with the government. By using anchoring vignettes, they are able to correct for possible differences in response scales across respondents. Although they find some significant differences in response scales across different groups of respondents, their effects on qualitative conclusions are minor, so that the difficulties cited above appear to be perceived equally important across different socioeconomic and ethnic groups. This suggests that a single policy (rather than group-specific policies) aimed at easing a particular difficulty can be implemented across the business population.
Foresight aspect of micro-entrepreneurs and its effects on the microenterprise performance is a novel field of study. This paper by Thapa (2014), published in the International Journal of Humanities and Social Science, used primary data enumerated from 501 randomly sampled micro-entrepreneurs across three ecological belts in Nepal to assess the effects of managerial foresight on the microenterprise performance in Nepal. The study observed significant indirect effects of educational attainment, need for achievement, need for autonomy, enterprise size, initial financial constraints, environmental hostility and social network on the microenterprise performance through managerial foresight. Managerial foresight appears to fortify the positive effects of educational attainment, initial financial constraints meanwhile reduce the negative effects of need for achievement, enterprise size, need for autonomy, environmental hostility and social network. The findings of this study, apart from confirming the findings of some of the previous studies and nullifying the findings of some other studies, have also explored some interesting mediating effects of managerial foresight on the microenterprise performance.
A significant amount of resources is spent every year on the improvement of transportation infrastructure in developing countries. In this paper, published as a CEPR discussion paper series, Asturias, García-Santana and Ramos (2016) investigate the effects of one such large project, the Golden Quadrilateral in India, on the income and allocative efficiency of the economy. They do so using a quantitative model of internal trade with variable markups. The authors find real income gains of 2.71% in the aggregate and that allocative efficiency accounts for 8% of these gains. The importance of allocative efficiency varies greatly across states, and can account for up to 19% of the overall gains. Thus, allocative efficiency can play an important role in determining both the size and distribution of gains from new infrastructure.
Bustos, Garber and Ponticelli (2016) study the allocation of capital across regions, sectors and firms. In particular, they assess to what extent growth in agricultural productivity can lead to an increase in the supply of credit in industry and services. For this purpose, the authors identify an exogenous increase in agricultural pro fits due to the adoption of genetically engineered soy in Brazil. They find that regions with larger increases in agricultural productivity experienced larger increases in local bank deposits. However, there was no increase in local bank lending. Instead, capital was reallocated towards other regions through bank branch networks. This increase in credit supply aff ected fi rms' credit access through the extensive and intensive margin. First, regions with more bank branches receiving funds from soy areas experienced an increase in credit market participation of small and medium sized fi rms. In addition, banks experiencing faster deposit growth in soy areas increased their lending to firms with whom they had preexisting relationships. In turn, these firms grew faster in terms of employment and wage bill. Their estimates imply that the elasticity of fi rm growth to credit is largest in the manufacturing sector. These fi ndings suggest that agricultural productivity growth can lead to structural transformation through a financial channel.
This paper by Shahidullah and Emdad Haque (2016), published in Enterprise Development and Microfinance, illustrates a shifted microfinance modality that adopted greening principles towards sustainability. The empirical context of the research was a green microfinance programme implemented by an NGO microfinance institution at two study sites in Bangladesh. The research conceived and tested a microfinance model underpinned by ‘ecological modernization’ and ‘innovation and entrepreneurship’ theories. Field studies were carried out between January 2012 and June 2013 in order to match the ‘theoretical realm’ with the ‘observational realm’. A case study and participatory methods were the primary means of studying the modality and operations of the green microfinance strategy. The study compared the ecological outcomes of green microfinance-assisted enterprises and traditional microcredit-assisted enterprises and measured their greenhouse gas (GHG) emissions. Cool Farm Tool software was used to quantify GHGs. Comparison with a designed experiment shows that micro-enterprises employing green strategies emit less GHGs than the ones with traditional strategies. The research revealed that the microfinance-based greening interventions help to ensure ecological outcomes for micro-enterprises; thus, the combination of the embedded economic and social elements of the classic microfinance model with the new ecological elements supports sustainability.
Firms informality is pervasive in Bangladesh. In this paper published in Economics Letters, De Giorgi and Rahman (2013) implemented an information campaign on registration and find that the treatment made firms more aware, but had no impact on registration. Low benefits and high indirect costs appear to be barriers to formality.
Efficiency of the hospitals affects the price of health services. Health care payments have equity implications. Evidence on hospital performance can support to design the policy; however, the recent literature on hospital efficiency produced conflicting results. Consequently, policy decisions are uncertain. Even the most of evidence were produced by using data from high income countries. Conflicting results were produced particularly due to differences in methods of measuring performance. Recently a management approach has been developed to measure the hospital performance. This approach to measure the hospital performance is very useful from policy perspective to improve health system from cost-effective way in low and middle income countries. Measuring hospital performance through management approach has some basic characteristics such as scoring management practices through double blind survey, measuring hospital outputs using various indicators, estimating the relationship between management practices and outputs of the hospitals. This approach has been successfully applied to developed countries; however, some revisions are required without violating the fundamental principle of this approach to replicate in low- and middle-income countries. In this paper published in the Journal of Korean Medical Science Adhikari (2015) clearly defined and applied the process to Nepal. As the results of this, the approach produced expected results. The paper contributes to improve the approach to measure hospital performance.
The impacts of cash grants and access to credit are known to vary widely, but progress on targeting these services to high-ability, reliable entrepreneurs is so far limited. This paper by Hussam, Rigol and Roth (2016) reports on a field experiment in Maharashtra, India that assesses (1) whether community members have information about one another that can be used to identify high-ability microentrepreneurs, (2) whether organic incentives for community members to misreport their information obscure its value, and (3) whether simple techniques from mechanism design can be used to realign incentives for truthful reporting. The researchers asked 1,380 respondents to rank their entrepreneur peers on various metrics of business profitability and growth and entrepreneur characteristics. They also randomly distributed cash grants of about $100 to measure their marginal return to capital. They find that the information provided by community members is predictive of many key business and household characteristics including marginal return to capital. While on average the marginal return to capital is modest, preliminary estimates suggest that entrepreneurs given a community rank one standard deviation above the mean enjoy an 8.8% monthly marginal return to capital and those ranked two standard deviations above the mean enjoy a 13.9% monthly return. When respondents are told their reports influence the distribution of grants, the researchers find a considerable degree of misreporting in favor of family members and close friends, which substantially diminishes the value of reports. Finally, they find that monetary incentives for accuracy, eliciting reports in public, and cross-reporting techniques motivated by implementation theory all significantly improve the accuracy of reports.
Beyond the role of economic forces, many theories of economic geography emphasize the way politics can shape the spacial configuration of economic activity. Bazzi, Chari, Nataraj and Rothenberg (2016) investigate the impact of changes in political regimes on industrial concentration using 30 years of data on Indonesian manufacturers. These data span both the reign of Suharto, one of the strongest central governments in Southeast Asia, and its collapse and the subsequent decentralization of power. Using the canonical measure of Ellison and Glaeser, they show that in the mid 1980s, Indonesia’s firms exhibited a similar degree of agglomeration as seen in the United States. Spatial concentration then declined until the 1998 Asian Financial Crisis, and has since begun to rise during the decentralization period. The authors also measure concentration using the continuous measure developed by Duranton and Overman (2005), and find that the agglomeration exhibited by Indonesian firms is also broadly similar to that documented by Duranton and Overman (2005) for the United Kingdom, although localization drops off more gradually in Indonesia than in the United Kingdom. Using this continuous measure of agglomeration, they identify 32 manufacturing clusters in Indonesia, and investigate the correlates of concentration. They find that the most robust drivers of agglomeration have been natural resources and supply chain linkages, especially with respect to explaining long-term changes in spatial concentration.
Throughout the developing world, many countries have created special economic zones to attract investment and spur industrial growth. In some cases, these zones are designed to promote development in poorer regions with limited market access and lower quality infrastructure, an example of a “big push” development strategy. In this paper, Bazzi, Chari, Nataraj and Rothenberg (2016) study the effects of Indonesia’s Integrated Economic Development Zone (KAPET) program. This program provided substantial tax-breaks for firms that locate in certain districts in the Outer Islands of Indonesia, a country with large regional differences in per-capita income and a history of policies to promote inclusive growth. The authors find that along many dimensions, KAPET districts experienced no better development outcomes, and in some cases fared even worse, than their non-treated counterparts. If anything, the strongest finding is that firms in KAPET districts paid lower taxes, but these tax reductions neither encouraged greater firm entry, increased migration, nor raised local measures of output or welfare. Overall, the KAPET program does not appear to have achieved the intended outcome of promoting growth in lagging regions. While there are many possible reasons that the KAPET program failed, their findings suggest caution in spending scarce resources to subsidize development in lagging regions.
Despite the importance of agglomeration externalities in theoretical work, evidence for their nature, scale, and scope remains elusive, particularly in developing countries. Identification of productivity spillovers between firms is a challenging task, and estimation typically requires, at a minimum, panel data, which are often not available in developing country contexts. In this paper, Bazzi, Chari, Nataraj and Rothenberg (2017) develop a novel identification strategy that uses information on the network structure of producer relationships to provide estimates of the size of productivity spillovers. Their strategy builds on that proposed by Bramoull´e et al. (2009) for estimating peer effects, and is one of the first applications of this idea to the estimation of productivity spillovers. The authors improve upon the network structure identification strategy by using panel data and validate it with exchange-rate induced trade shocks that provide additional identifying variation. They apply this strategy to a long panel dataset of manufacturers in Indonesia to provide new estimates of the scale and size of productivity spillovers. Their results suggest positive productivity spillovers between manufacturers in Indonesia, but estimates of TFP spillovers are considerably smaller than similar estimates based on firm-level data from the U.S. and Europe, and they are only observed in a few industries.
Yoon Lee and Shin (2017) analyze the e ffect of technological change on inequality using a novel framework that integrates an economy's skill distribution with its occupational and industrial structure. Individuals become a manager or a worker based on their managerial vs. worker skills, and workers further sort into a continuum of tasks (occupations) ranked by skill content. Their theory dictates that faster technological progress for middle-skill tasks raises the employment shares and relative wages of lower- and higher-skill occupations (horizontal polarization), but also raises those of managers over workers as a whole (vertical polarization). Both dimensions of polarization are faster within sectors that depend more on middle-skill tasks and less on managers. This endogenously leads to faster TFP growth among such sectors, whose employment and value-added shares shrink if sectoral goods are complementarity to each other (structural change). In the limiting growth path, middle-skill occupations vanish but all sectors coexist. The authors present several novel facts that support their model, followed by a quantitative analysis that shows that task-specifi c technological progress - which was fastest for occupations embodying routine-manual tasks but not interpersonal skills - is important for understanding changes in the sectoral, occupational, and organizational structure of the U.S. economy since 1980. In contrast, skill-biased and/or sector-specifi c technological change played only a minor role.
Governments around the world have introduced reforms to attempt to make it easier for informal firms to formalize. However, most informal firms have not gone on to become formal, especially when tax registration is involved. Thanks to a randomized experiment based around the introduction of the entreprenant legal status in Benin, this paper by Benhassine, McKenzie, Pouliquen and Santini (2016) provides evidence from an African context on the willingness of informal firms to register after introducing a simple, free registration process, and to test the effectiveness of supplementary efforts to enhance the presumed benefits of formalization by facilitating its links to government training programs, support to open bank accounts, and tax mediation services. Few firms register when just given information about the new regime, but 9.6 percentage points more register when they were visited in person and the benefits were explained. The full package of supplementary efforts boosts the impact on the formalization rate to 16.3 percentage points, demonstrating that enhancing the benefits of formalization does induce more firms to formalize. Firms that are larger, and that look more like formal firms to begin with, are more likely to formalize, providing guidance for better targeting of such policies. However, formalization appears to offer limited benefits to the firms, and the costs of personalized assistance are high, suggesting that such enhanced formalization efforts are unlikely to pass cost-benefit tests.
Many states struggle to enforce contracts. The origin of the state's "legal capacity" to enforce contracts is often explained as a result of past choices by rulers. However, after transactions are made, contracts are enforced by administrators, whose incentives to enforce them diff er from those of rulers (Greif, 2007). In this paper, Sanchez de la Sierra (2016) randomly introduces state-backed contracts into the agency relationships between traders and customers of a market he created in the Democratic Republic of the Congo. The patterns of agents' shirking reflect that they expect contracts to be enforceable, but only by traders from ethnic groups who control the administration. Furthermore, state contracts, when applied among groups who can enforce them, generate higher volumes of trade speci fically by improving the expectations about the traders' future behavior, and can substitute for informal ethnic based contract enforcement, absent between ethnic groups. The results suggest that while social institutions govern agency relations, social institutions also govern the administration, which limits the impact of state capacity on contract enforceability and distorts the patterns of trade.
Organizational learning, or the sharing of knowledge among co-workers in fi rms, has long been assumed to be a key driver of productivity growth. However, because knowledge exchange is inherently difficult to observe, identifying the e ffect of knowledge sharing on productivity has remained problematic. The literature has often measured knowledge exchange in fi rms through increases in productivity of workers if other workers in the same firm have already produced the same product. However, this approach risks confounding the e ffect of knowledge exchange with other peer e ffects, such as competition. This paper by Andreas Menzel (2016) provides evidence from a communication intervention in three Bangladeshi garment factories in which randomly selected workers were instructed by their superiors to share production knowledge when one worker started producing a garment that the other had already produced. The intervention increased the productivity of the later workers producing the garment by 0.2 standard deviations during the first one to two days they produce the garment, before their productivity reached its long-run level again. There is some evidence that the e ffect was stronger if the workers sharing knowledge were socially connected. A back-of-the envelope calculation indicates that the return on this low-cost intervention is in excess of 600 percent. Furthermore, compliance by the factories in implementing the intervention was higher if the later workers that should receive knowledge were younger. This indicates that workers' status concerns could interfere with the implementation of such a management routine, and could explain why the routine had not been implemented earlier by the factories.
Distance between buyers and sellers can create search and contracting problems: how to find out what goods are available in far away places, and ensure they are actually delivered? Travelling to do business in person is one way of dealing with both, transforming a remote transaction into one that is face-to-face. In this working paper Startz (2016) estimates the magnitude of search and contracting frictions in a developing country context by exploiting the fact that travel is a common, costly, and easily observable strategy for coping with them. The author collects transaction-level panel data from Nigerian importers of consumer goods that combines the what of trade (e.g. products, quantities) with variables describing how trade is conducted (e.g. travel, payment terms). To account for patterns inconsistent with a full information environment, the author builds and estimates a model that embeds a search problem and a repeated game with moral hazard into a monopolistically competitive trade framework. Welfare from imported consumer goods would be 29% higher in the absence of both frictions. The author decomposes the total barrier into parts attributable to search and to contracting, and show why the effects will be larger in markets with low consumer spending, high firm entry/exit rates, and frequently changing products. The results suggest that greater attention to market integration policies beyond transportation and tariffs could have large welfare effects, particularly in developing countries. In counterfactual scenarios, the author shows that deregulation of air travel between Nigeria and China would yield gains in Nigeria on the order of $650 million per year through consumer goods trade alone, while existing financial services do little to mitigate frictions because they do not oer a better contract enforcement technology than travel or repeated interaction.
In this paper published in the American Economic Review, Bustos, Caprettini and Ponticelli (2016) study the effects of the adoption of new agricultural technologies on structural transformation. To guide empirical work, the authors present a simple model where the effect of agricultural productivity on industrial development depends on the factor bias of technical change. They test the predictions of the model by studying the introduction of genetically engineered soybean seeds in Brazil, which had heterogeneous effects on agricultural productivity across areas with different soil and weather characteristics. They find that technical change in soy production was strongly labor saving and led to industrial growth, as predicted by the model.
In this working paper Townsend and Zhorin (2014) present a contract-based model of industrial organization that allows us to consider in a unified way both different information frictions (moral hazard, adverse selection, both) and a variety of market structures (monopoly, imperfect competition, various strategic interactions). They show how this method can be applied to the spread of the banking industry in emerging market countries, emphasizing observed transitions, namely the geographic locations of branches. Local collusive monopoly organizations and Bertrand-like competitive environments in location and utility space are considered alongside with frictions affecting the outcome , namely provincial spatial costs and the information structure. Mixed environments with fully informed local incumbents and entrants facing adverse selection are analyzed. Their larger goal, beyond calibrated numerical examples, is to develop a framework with an operational toolkit for empirical work.
This working paper by Townsend and Samphantharak (2016) provides a theory-based empirical framework for understanding the risk and return on productive capital assets and their allocation across activities in an economy characterized by idiosyncratic and aggregate risk and thin formal markets for real and financial assets. They apply their framework to households running business enterprises in Thai villages with extensive networks, taking advantage of panel data: income, assets, consumption, gifts, and loans. They decompose risk and estimate the risk premia faced by households, distinguishing aggregate risk from idiosyncratic, potentially diversifiable risk. This distinction matters for estimating measures of underlying productivity and has important policy implications.
In this working paper Townsend, Moll and Zhorin (2016) use a variety of different data sets from Thailand to study not only the extremes of micro and macro variables but also within-country flow of funds and labor migration. They develop a general equilibrium model that encompasses regional variation in the type of financial friction and calibrate it to measured variation in regional aggregates. The model predicts substantial capital and labor flows from rural to urban areas even though these differ only in the underlying financial regime. Predictions for micro variables not used directly provide a model validation. Finally they estimate the impact of a policy counterfactual, regional isolationism.
In this working paper Townsend, Dabla-Norris, Ji and Unsal (2015) develop a micro-founded general equilibrium model with heterogeneous agents and three dimensions of financial inclusion: access (determined by a participation cost), depth (determined by a borrowing constraint), and intermediation efficiency (determined by a monitoring cost). They find that the economic implications of financial inclusion policies vary with the source of frictions. In partial equilibrium, they show analytically that relaxing each of these constraints separately increases GDP. However, when constraints are relaxed jointly, the impacts on the intensive margin (increasing output per entrepreneur with access to credit) are amplified, while the impacts on the extensive margin (promoting credit access) are dampened. In general equilibrium, they discipline the model with firm-level data from six countries and quantitatively evaluate the policy impacts. Multiple frictions are necessary to match the country-specific variables, e.g., credit access ratio, interest rate spread, and non-performing loans. A TFP decomposition finds that most of the productivity gains are captured by a between-regime shifting effect, whereby talented entrepreneurs obtain credit and expand their businesses. In terms of inequality and welfare, reducing the participation cost benefits talented-but-poor agents the most, while relaxing the borrowing constraint or intermediation cost is more beneficial for talented-and-wealthy agents.
In this working paper Townsend and Jain (2016) present a tractable model of platform competition in a general equilibrium setting, allowing multiple platforms to emerge. We endogenize the size, number and type of each platform, allowing for different utility functions, different endowments for varying types of agents, and different capital costs. Contrary to the prior macro-financial literature on network architecture and the partial equilibrium industrial organization literature on two sided markets, our economy is efficient. Platforms internalize the network effects of adding more and different types of users by offering bundles which state both the number and composition of users. They use a Walrasian equilibrium concept and allow the price of joining a platform to depend not only on the characteristics of the platform, but the identified type of user. The sum of fees paid for a given active platform will cover its costs. With this extended commodity space and bundling, the first and second welfare theorems apply. They argue against distortions created through fees and the presumption that platforms with externalities have to be regulated.
In this working paper Townsend and Kilenthong (2016) show how bundling, exclusivity and additional markets internalize fire sale and other pecuniary externalities. Ex ante competition can achieve a constrained efficient allocation. The solution can be put rather simply: create segregated market exchanges which specify prices in advance and price the right to trade in these markets so that participant types pay, or are compensated, consistent with the market exchange they choose and that type’s excess demand contribution to the price in that exchange. We do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.
In this working paper Moser and Engbom (2016) assess the extent to which a rise in the minimum wage can account for three facts characterizing a large decline in earnings inequality in Brazil from 1996–2012: (i) the decline is more pronounced towards the bottom of the distribution; (ii) one quarter of the decline stems from an increase in relative pay at less productive firms; and (iii) another quarter is attributable to falling pay differences due to worker heterogeneity. To this end, they build an equilibrium search model with heterogeneity in worker ability and firm productivity. The central feature of the model is the presence of spillover effects of the minimum wage on higher earnings ranks due to monopsonistic competition among firms for workers. They estimate the model using indirect inference and find that the rise in the minimum wage explains 70 percent of the decline in the variance of log earnings. Spillover effects of the minimum wage account for more than half of this decline and quantitatively match the three empirical facts. Their results suggest that labor market dynamics can lead to large effects of policy on earnings inequality
This paper by Anderson, Chandy and Zia (2016) examines the impact of improvements in marketing skills relative to finance skills among small business owners. It addresses three important questions: (1) What is the impact of marketing or financial skills on business performance? (2) How do improvements in marketing and finance skills respectively affect business outcomes? (3) Who benefits most from increases in marketing relative to finance skills? Through a randomized control study of 852 firms in South Africa, the analysis finds significant improvements in profitability from both types of business skills training. However, the pathways to achieve these gains differ substantially between the two groups. The marketing group achieves greater profits by adopting a growth focus on higher sales, greater investments in stock and materials, and hiring more employees. The finance group achieves similar profit gains but through an efficiency focus on lower costs. Both groups show significantly higher adoption of business practices related to their respective training program. Consistent with a growth focus, marketing/sales skills are significantly more beneficial to firm owners who ex ante have less exposure to different business contexts. In contrast and in line with an efficiency focus, entrepreneurs who have been running more established businesses prior to training benefit significantly more from finance/accounting skills.
In this report Andrew Kerr (2015) describes the Manpower Surveys (MS). The MS was a firm survey which provided detailed data on the occupations, gender race and sector of the employed in each establishment during the Apartheid period, stretching back to the 1950s (Crankshaw, 1995; Seekings, 2003; Mariotti, 2009; Department of Manpower/Labour, various years). It was conducted by the Department of Manpower (DoM) (which later changed its name to the Department of Labour) until 1985, and then the Central Statistical Services (CSS- the forerunner of Statistics South Africa) until 1996 (Crankshaw, 1995) when it was renamed the Occupational Survey (Lee, Woolard, & Wilson, 2004). In 1998 it was replaced by the Survey on Occupation by Race and Gender, but this survey was discontinued and never made it beyond a pilot phase (Lee, Woolard, & Wilson, 2004). DataFirst has acquired some data from these surveys and placed them on the DataFirst web portal for public access. The author thus also describes the data that has been made available and provides some basic descriptive analysis of the data, with the aim of giving an introduction to the data and encouraging other researchers to make use of it.
In this paper Andrew Kerr (2015) uses a new source of firm level panel data to describe and better understand the life cycle of South African manufacturing firms. An important point to emerge from recent firm level work is that there are substantial cross country differences in the size of firms and in the relationship between plant age and size (Hsieh and Klenow, 2014), generated by differences in the importance of selection and within firm growth as well as changes in size of entering cohorts (Sandefur 2010, Davies and Kerr 2015). These differences may indicate substantial misallocation of resources and low firm level investment in developing countries. South Africa is an interesting country to study in this regard because the importance of informal firms is small and the problems usually associated with running formal firms in developing countries, such as a lack of contract enforcement and the resultant lack of hiring non-family managerial labour (Akcigit, Alp, and Peters 2014), thin land markets, and financial frictions (Hsieh and Klenow 2014), are not as prevalent. But clearly - given the extremely large levels of unemployment - South African firms are not generating enough employment. A lack of within firm growth, high equilibrium levels of exit or low equilibrium levels of entry are possible reasons for the low employment equilibrium South Africa finds itself in. The author investigates these possibilities further by exploring the life cycle growth of manufacturing firms using a new source of firm level panel data. The Cape Town RSC panel data set is a census of formal firms in the City of Cape Town between 2000 and 2006. Yearly administrative data is available on basic firm characteristics (wage bill and revenue) and operating status and an initial survey collected more detailed data on around two thirds of the firms that were operating in 2000. The author uses the subset of manufacturing firms in this paper.
African agricultural markets are characterized by low revenues for smallholder farmers and high food prices for consumers. There has long been concern that this price wedge between farmers and consumers – and the resulting loss in producer and consumer welfare – are driven in part by imperfect competition among the intermediaries that connect them. In this paper Falcao Bergquist (2016) implements three randomized control trials that are tightly linked to a model of market competition in order to estimate key parameters governing the competitive environment of Kenyan agricultural markets. First, the author reduces the marginal costs of traders in randomly selected markets, and finds that only 22% of this cost reduction is passed through to consumers. Second, to elicit the shape of consumer demand that these traders face, she randomizes price discounts and measure the quantities that customers purchase at these prices. Taken together, these estimates reveal a high degree of collusion among intermediaries, with large implied losses to consumer welfare and overall market efficiency. Third, given that a natural policy response to limited competition is to encourage greater firm entry, she randomly incentivizes the entry of new traders into markets. By capturing the resulting effect on local market prices, the author identifies the implied change in the competitive environment due to entry. She finds that the estimates are consistent with a model in which entrants are able to easily join collusive agreements with incumbents. Taken together, the results suggest that agricultural traders in Kenya have considerable market power, and that marginal changes in market entry are unlikely to induce significant changes in competition. These findings have implications for the incidence of technological and infrastructure changes in African agriculture and for the policy responses aimed at improving the market environment.
This paper by Xiaoyang (2016) uses Ghana as a case study to illustrate the extent to which Chinese manufacturing firms are driving manufacturing in an African country. Through the combination of desktop and field research, the author finds that the total number of Chinese manufacturing investments in Ghana indeed has been increasing during past decade, but quite a few projects were abandoned or not implemented due to concern over the unfavorable investment environment. Small and large manufacturing projects can be found in different sectors, from plastic, steel to pharmaceuticals and others. All the manufacturing investments target at the local and regional market, either taking advantage of local raw materials or seeing opportunities in the market of little competition. “From trade to invest” and clustering are identified as the main patterns for Chinese investors to settle down in Ghana. Chinese firms have local suppliers of simple raw materials, but the industrial supplies are all imported from abroad. Learning from Chinese business models, a few local businessmen start their own manufacturing projects, mostly in the sector of plastic recycling, but lack of capital appeared to be the main obstacle keeping local players from moving up the value chain. The weak economic environment of Ghana itself proved to be limiting the technology transfer and local linkage between Chinese firms and Ghanaians.
As China’s economic boom has boosted domestic growth and income, higher wage costs are moving an increasing number of Chinese firms overseas. This presents a favorable opportunity for less developed countries in Africa and Asia to boost their export and manufacturing sectors, as well as opportunities to absorb Chinese industries seeking to reduce costs offshore. This working paper by Brautigam, Chen, Sun, Ukaejiofo and Xiaoyang (2016) examines new trends of Chinese foreign direct investment and technology transfer in Nigeria’s manufacturing sector, and evaluates their potential to catalyze further industrialization in Nigeria. Fieldwork investigations of both Chinese and Nigerian firms in three regions of Nigeria show some evidence of positive, if limited, technology transfer, although they also reveal negative perceptions towards Chinese investment. While Nigerian economic policies have served to promote Chinese investment and skills promotion in Nigeria, a more coherent strategy is needed to leverage this new, growing source of capital and the potential resources it brings.
Are some management practices akin to a technology that can explain company and national productivity, or do they simply reflect contingent management styles? In this working paper Bloom, Sadun and Van Reenen (2016) collect data on core management practices from over 11,000 firms in 34 countries. They find large cross-country differences in the adoption of basic management practices, with the US having the highest size-weighted average management score. They present a formal model of “Management as a Technology”, and structurally estimate it using panel data to recover parameters including the depreciation rate and adjustment costs of managerial capital (both found to be larger than for tangible non-managerial capital). Their model also predicts (i) a positive effect of management on firm performance; (ii) a positive relationship between product market competition and average management quality (part of which stems from the larger covariance between management with firm size as competition strengthens); and (iii) a rise (fall) in the level (dispersion) of management with firm age. They find strong empirical support for all of these predictions in our data. Finally, building on our model, they find that differences in management practices account for about 30% of cross-country total factor productivity differences.
In this working paper Bloom, Lemos, Choudhary and Van Reenen (2016) collect data on management practices in the Punjab region of Pakistan (PK-MOPS) following the MOPS approach pioneered by Bloom et al (2013) for US manufacturing plants. Looking across almost 2,000 establishments they find very wide variation in the management score across firms (and areas within Punjab). Pakistan plants have lower average management scores than the US and a higher level of dispersion, suggesting that weakly managed firms exit more slowly in Pakistan. Establishments with higher management scores are significantly more productive, profitable and grow faster. A one standard deviation increase in the management score is associated with 21% higher labor productivity – almost identical to the US. As in other work, well managed firms are larger, more skilled, more likely to export and older. Controlling for these other factors, publicly listed firms have significantly lower management scores that other ownership types, which is different from other countries.
The idea that worker utility is affected by co-worker wages has potentially broad labor market implications. In a month-long experiment with Indian manufacturing workers, Breza, Kaur and Shamdasani (2016) randomize whether co-workers within production units receive the same flat daily wage or different wages (according to baseline productivity rank). For a given absolute wage, pay inequality reduces output and attendance by 0.24 standard deviations and 12%, respectively. These effects strengthen in later weeks. Pay disparity also lowers co-workers’ ability to cooperate in their self-interest. However, when workers can clearly observe productivity differences, pay inequality has no discernible effect on output, attendance, or group cohesion.
The willingness of firms to provide general training to workers depends on the productivity gains from training and the likelihood that workers are retained. In this paper Adhvaryu, Kala and Nyshadham (2016) evaluate the impacts of training in soft skills development on the workplace outcomes of female garment workers in Bengaluru, India. They implemented a lottery determining access to the program by randomizing lines and then workers within lines to treatment, which allows us to capture treatment effects and program spillovers. They find that despite a high overall turnover rate, more treated workers are retained during the training period; this difference disappears after training is complete. Treated workers are 12 percent more productive than controls. Within-team spillovers in productivity and task complexity are substantial. Survey outcomes support the hypothesis that the program increased the stock of soft skills, which raised workers’ marginal products. Wages increase by 0.5 percent after program completion. Pairing their point estimates with program costs, they calculate that the net return to on-the-job soft skills training for garment workers is large – about 250 percent 9 months after program completion.
In this working papers Nchake, Edwards and Sundaram (2015) study the relationship between price-setting behavior and the degree of competition in a setting where markets and information flows are relatively imperfect. Using a unique dataset that combines survey data on retail outlets in Lesotho, and detailed historical information on their product prices, they find a non-monotonic relationship between the frequency of price changes and perceived competition, measured by the number of reported competitors. This non-monotonic relationship is consistent with a model of increasing costs of coordinating price changes under tacit collusion with few competitors, and a breakdown of collusion at higher levels of competition.
This paper by Kerr, Duranton, Grover and Ghandi (2015) quantifies the misallocation of manufacturing output and factors of production between establishments across Indian districts during 1989–2010. It first distills a number of stylized facts about misallocation in India, and demonstrates the validity of misallocation metrics by connecting them to regulatory changes in India that affected real property. With this background, the study next quantifies the implications and determinants of factor and output misallocation. Although more-productive establishments in India tend to produce more output, factors of production are grossly misallocated. A better allocation of output and factors of production is associated with greater output per worker. Misallocation of land plays a particularly important role in these challenges.
Growing research and policy interest focuses on the misallocation of output and factors of production in developing economies. This working paper by Kerr, Duranton, Grover and Ghani (2016) considers the possible misallocation of financial loans. Using plant-level data on the organized and unorganized sectors, the paper describes the temporal, geographic, and industry distributions of financial loans. The focus of the analysis is the hypothesis that land misallocation might be an important determinant of financial misallocation (for example, because of the role of land as collateral against loans). Using district-industry variations, the analysis finds evidence to support this hypothesis, although it does not find a total reduction in the intensity of financial loans or those being given to new entrants. The analysis also considers differences by gender of business owners and workers in firms. Although potential early gaps for businesses with substantial female employment have disappeared in the organized sector, a sizeable and persistent gap remains in the unorganized sector.
This paper by Teshima, Sugita and Seira (2015) examines the mechanism determining the matching of exporting firms and importing firms. From transaction data of Mexican textile/apparel exports to the US, they report two new facts on exporter–importer matching at the product level. First, matching is approximately one-to-one. Second, in response to the entry of Chinese exporters into the US market induced by the end of the Multifibre Arrangement (MFA), US importers switched their Mexican partners to those making greater preshock exports whereas Mexican exporters switched their US partners to those making fewer preshock imports. To explain these facts, they present a model combining Becker-type positive assortative matching of final producers and suppliers by their capability with the standard Melitz-type model. The model indicates that the observed matching change is evidence for a new source of gains from trade associated with firm heterogeneity.
Family firms are the most prevalent type of firm in the world and account for a large proportion of the economic activity and employment, especially in developing countries. We consider firms to be “family controlled” when the founding family owns over 25% of shares and the CEO is a family member. In this paper Lemos and Scur (2016) investigate the relationship between family control and firm organization and performance in the manufacturing sector of primarily emerging economies. To do this they collect a new detailed dataset of the succession history in terms of ownership (who owns the shares) as well as control (who is the CEO) for over 800 firms in Latin America, Africa and Europe. They merge this with a unique dataset on firm performance and organizational structures, including on quality of managerial practices. They exploit exogenous variation in the composition of the family CEO’s children, and use it as an instrumental variable for family ownership and control. Their results suggest that family-owned-and-controlled firms are worse managed, with coefficients being over twice larger under 2SLS than OLS. In general the negative link seems to stem from the family vs non-family control rather than simply family or non-family ownership. Firms owned by families but with non-family CEOs do not suffer from the deficit in management quality.
This working paper published by Galle (2016) develops a novel general-equilibrium model of the relationship between competition, financial constraints and misallocation, and tests its implications using Indian plant-level panel data. In the model, steady-state misallocation consists of both variable markups and capital wedges. The variable markups arise from Cournot-type competition, whereas the capital wedges result from the interaction of firm-level productivity volatility with financial constraints. Firms experience random shocks to their productivity and in response to positive productivity shocks they optimally grow their capital stock, subject to financial constraints. Competition plays a dual role in affecting misallocation. On the one hand, both markup levels and markup dispersion tend to fall with competition, which unambiguously improves allocative efficiency in a setting without financial constraints. On the other hand, in a setting with financial constraints, a reduction in markups is associated with slower capital accumulation, as the rate of self-financed investment falls. Thus, the positive impact of competition on steady-state misallocation is reduced by the presence of financial constraints. Empirically, he tests and confirms the qualitative predictions of the model with data on Indian manufacturing. The prediction that the firm-level speed of capital convergence falls with competition is confirmed for the full panel of manufacturing plants in India’s Annual Survey of Industries. This effect is particularly pronounced in sectors with higher levels of financial dependence. He also exploits natural variation in the level of competition, arising from the pro-competitive impact of India’s 1997 dereservation reform on incumbent plants, and again confirms the qualitative predictions of the model.
In this working paper Adhvaryu, Kala and Nyshadham (2016) document how differences in managerial quality likely contribute significantly to firm productivity gaps between firms in developed and developing countries. But how specifically does management affect productivity? They model one potential channel for this effect: good managers are better able to deal with shocks to worker productivity. They test the model’s predictions in an Indian garment factory, using hourly data on worker and line productivity, rich survey measures of managerial quality, and exogenous variation in pollution exposure, an important shock to worker effort. They find that lines supervised by higher quality managers (those better at identifying and solving production issues in general, and those who specifically monitor production more frequently and are more likely to replace underperforming workers) are more productive and exhibit more frequent reallocation of workers across tasks. They also find that productivity suffers in response to higher pollution exposure, and that the frequency of task reallocation rises as pollution deviates from median levels. Moreover, lines supervised by higher quality managers suffer substantially smaller losses in the face of higher pollution exposure, by way of increased task reallocation. Finally, they validate their indices of managerial quality against a measure of supervisor TFP, and provide descriptive evidence of the specific practices, management styles, and personality traits that contribute to managerial quality
In this working paper Alvarez, Benguria, Engbom and Moser (2016) document a large decline in earnings inequality in Brazil between 1996 and 2012. Using administrative linked employer-employee data, they fit high-dimensional worker and firm fixed effects models to identify the sources of this decline. Firm effects account for 45 percent of the total decline and worker effects for 24 percent. While pay-relevant firm and worker characteristics became more dispersed over the period,the inequality decline is driven by falling returns in pay to these variables. They conclude that changes in pay policies,rather than changes in firm and worker fundamentals, played a significant role in Brazil’s inequality decline.
In this working paper Bustos, Garber and Ponticelli (2016) study the allocation of capital across sectors and regions. In particular, they assess to what extent growth in agricultural profits can lead to an increase in the supply of credit in industry and services. For this purpose, the authors identify an exogenous increase in agricultural profits due to the adoption of genetically engineered soy in Brazil. The new agricultural technology had heterogeneous effects in areas with different soil and weather characteristics. They find that regions with larger increases in agricultural profitability experienced increases in local bank deposits. However, there was no increase in local bank lending. Instead, capital was reallocated towards other regions through bank branch networks. Regions with more bank branches receiving funds from soy areas experienced both an increase in credit supply and faster growth of small and medium sized firms.
Previous studies of peer-to-peer technology diff usion have primarily focused on the decision of potential adopters. Equally relevant for observed di ffusion in many contexts is the willingness of incumbent adopters to actively share technology. Hardy and McCasland (2016) report the results of a field experiment that considers both parties involved in the di ffusion process. Specifi cally, the authors develop a new weaving technique and randomly seed both training and a limited number of one-time technique-specifi c contracts in a real network of garment making firm owners in Ghana. They find that firms that need the technology to complete the contract learn it from fi rms that received training; however, fi rms selected to receive only training and no contract off er are much less likely to share the technology than those selected to receive both. They document spillover eff ects in both learning and teaching from baseline technology sharing contacts, but also find that networks display dynamic properties: a large number of fi rm owners generate new technology sharing contacts in response to the experiment. Teaching patterns to both pre-existing connections and new contacts follow the overall pattern, in which fi rms selected to receive both training and experimental demand are most likely to share the technology. The authors interpret these findings as evidence that experimental competition disincentivized di ffusion, which is supported with additional evidence exploiting random order size and order timing. Finally, they develop a model which conceptualizes observed diff usion patterns as endogenously resulting from both static dyad-speci c and dynamic technology-speci c costs and benefi ts to both the potential learner and the potential teacher.
Property rights are important for economic exchange, but in much of the world they are not publicly provided. Private market organizations can fill this gap by providing an institutional structure to enforce agreements, but with this power comes the ability to extort from the group's members. Under what circumstances will private organizations provide a stable environment for economic activity? Using survey data collected from 1,878 randomly sampled traders across 269 markets, 68 market leaders, and 55 government revenue collectors in Lagos, Grossman (2016) finds that strong markets maintain institutions to support trade not in the absence of government, but rather as a response to active interference. The author argues that organizations develop pro-trade institutions when threatened by politicians they perceive as predatory, and when the organization can respond with threats of its own. Under this balance of power, the organization will not extort because it needs trader support to keep threats credible.
In this paper, Cai and Szeidl (2016) organized business associations for the owner-managers of randomly selected young Chinese fi rms to study the eff ect of business networks on rm performance. They randomized 2,800 fi rms into small groups whose managers held monthly meetings for one year, and into a "no-meetings" control group. They fi nd that: (1) The meetings increased firm revenue by 8.1 percent, and also signi cantly increased profi t, factors, inputs, the number of partners, borrowing, and a management score; (2) These e ffects persisted one year after the conclusion of the meetings; and (3) Firms randomized to have better peers exhibited higher growth. The authors exploit additional interventions to document concrete channels. (4) Managers shared exogenous business-relevant information, particularly when they were not competitors, showing that the meetings facilitated learning from peers. (5) Managers created more business partnerships in the regular than in other one-time meetings, showing that the meetings improved supplier-client matching. (6) Firms whose managers discussed management, partners, or finance improved more in the associated domain, suggesting that the content of conversations shaped the nature of gains.
Developing country entrepreneurs face family pressure to share income. This pressure, a kinship tax, can distort capital allocations. Squires (2016) combines evidence from a lab experiment - which allows to estimate an individuallevel sufficient statistic for the distortion - with data collected on a sample of Kenyan entrepreneurs, to quantify the importance of the tax. The data reveal high kinship tax rates for a third of entrepreneurs in the sample. The quantitative analysis makes use of a simple structural model of input allocation fitted to the data, and implies that removing distortions from kinship taxation would increase total factor productivity by 26%, and increase the share of workers in firms with fi ve or more employees from 9% to 56%. These eff ects are substantially larger than those coming from credit market distortions, which the author estimates using a cash transfer RCT. The analysis also implies strong complementarities between kinship taxation and credit constraints.
Blumenstock, Callen and Ghani (2015) provide evidence that violence aff ects how people make fi nancial decisions. Exploiting the quasi-random timing of several thousand violent incidents in Afghanistan, the authors show that individuals who are exposed to violence are less likely to adopt and use mobile money, a new financial technology, and are more likely to retain cash on hand. This e ffect is corroborated using data from three independent sources: (i) the entire universe of 5 years of mobile money transactions in Afghanistan; (ii) high-frequency data from a randomized experiment designed to increase mobile money adoption; and (iii) a behavioral lab-in-the-fi eld experiment with experienced mobile money users. Collectively, the evidence highlights an economic cost of violence that operates through individual beliefs, which is large enough to impede the development of formal financial systems in conflict settings.
Despite substantial interest in the potential for mobile money to positively impact the lives of the poor, little empirical evidence exists to substantiate these claims. In this paper, Blumenstock, Callen and Ghani (2015) present the results of a field experiment in Afghanistan that was designed to increase adoption of mobile money, and determine if such adoption led to measurable changes in the lives of the adopters. The specific intervention the authors evaluate is a mobile salary payment program, in which a random subset of individuals of a large firm were transitioned into receiving their regular salaries in mobile money rather than in cash. They separately analyze the impact of this transition on both the employer and the individual employees. For the employer, there were immediate and significant cost savings; in a dangerous physical environment, they were able to effectively shift the costs of managing their salary supply chain to the mobile phone operator. For individual employees, however, the results were more ambiguous. Individuals who were transitioned onto mobile salary payments were more likely to use mobile money, and there is evidence that these accounts were used to accumulate small balances that may be indicative of savings. However, the authors find little consistent evidence that mobile money had an immediate or significant impact on several key indicators of individual wealth or well-being. Taken together, these results suggest that while mobile salary payments may increase the efficiency and transparency of traditional systems, in the short run the benefits may be realized by those making the payments, rather than by those receiving them.
In April 2014, the Government of Benin launched the entreprenant status, a simplified and free legal regime offered to small informal businesses to enter the formal economy. This paper by Benhassine, Mckenzie, Pouliquen and Santini (2015) presents the short-term results of a randomized impact evaluation testing three different versions of the entreprenant status on business registration decisions, each version including incremental incentives to registration: (i) information on the new legal status and its benefits, (ii) business training, counseling services, and support to open a bank account, (iii) tax mediation services. The study included 3,600 informal businesses operating with a fixed location in Cotonou, Benin, which were randomly allocated between three treatment groups and one control group. One year after the program launch, all versions of the program had significant impact on formalization rates. The impact was 9.1 percentage points in the first treatment group; 13 percentage points in the second group; and 15.8 percentage points in the last group. The program had a higher impact on male business owners, with more education, operating outside Dantokpa Market, in sectors other than trade, and that before being offered the incentives to formalization had characteristics similar to businesses that were already formal. Data from a second follow-up survey, which is expected to take place in March 2016, will explore the impacts on other outcomes, like business performances or access to banking.
In this paper published in Innovation and Development, Egbetokun, Mendi and Mudida (2015) present and analyse firm-level innovation data from Kenya and Nigeria. The authors test for the existence of complementarities between internal R&D and external innovation activities, and between organizational and marketing innovations. Some evidence is found on the existence of complementarities between internal and external technological innovation strategies in the case of Kenya, but not in the case of Nigeria. However, organizational and marketing innovations do not appear to be complementary in innovation either in Kenya or in Nigeria.
This paper by Hassan and Lucchino (2016) provides evidence about whether access to light, which relaxes the time constraint in relation to the number of productive hours available, can stimulate the emergence of currently pent-up productive potential, particularly of women. In doing so, it also brings evidence to the broader question of whether a cheap and renewable source of energy used exclusively for lighting, like a solar lamp, allows to reap (some of) the above economic benefi ts of full scale electri fication. To understand and quantify these dynamics, we exploit random variation in solar lamp ownership among 806 parents participating in the companion randomised controlled trail on the effects of access to light on education. The authors find that access to light contributes to a diversifi cation in household livelihoods from agricultural to non-farm economic activities. This evidence is supported by a consistent set of results across time use, the incidence of diff erent productive activities, and incomes levels. To the authors' knowledge, this constitutes the fi rst robust evidence that small scale lighting source can help stimulate the very first steps in the direction of economic transformation. At the same time, the paper delivers some sobering evidence on the gender dimension of the eff ect of access to light. While they find evidence that access to light does indeed relax time constraints, and those of women in particular, they fi nd that a large part of the benefi ts of this additional time ultimately flows to men.
This paper published in the World Development reviews competing theories about the causes of informality in developing countries and uses new data to determine which theory best explains the persistence and scale of Indonesia’s informal sector. Using nationally representative survey data on micro, small, and medium-sized firms, Rothenberg et al. (2016) find that most of Indonesia’s informal firms are very small, micro firms, with less than five employees. These firms pay low wages, are relatively unproductive when compared to large firms, are managed by individuals with low educational attainment, predominantly supply products to local markets, and have not recently attempted to expand their operations. From a small-scale, qualitative survey of firms, the authors find that many informal firms do not register their businesses either because they have no desire to expand or borrow from formal financial sources, or because they are avoiding taxes. Finally, the authors evaluate the impact of Indonesia’s one-stop-shops for business registration program, a large-scale program that attempted to reduce registration costs. The authors find both that the program had no effects on firms’ informality rates and that it did not reduce the probability that workers were informally employed. Taken together, the evidence suggests that a combination of the rational exit and the dual economy theories best explains why so many firms in Indonesia are informal.
Political connection is multiform, and each of its components may affect the enterprise in different ways. In this article published in SAGE Open, Akouwerabu (2016) studied the advantages of two types of political connections with data from private enterprises. An enterprise can financially support a political party’s campaigns or support only a single candidate of a political party. The enterprises choose between these two types of political connections according to the respective profitability of each. The author makes use of primary data collected in 2014 from enterprises that take part in Burkina Faso’s public procurements to analyze the expenses and profits linked to each of these political connections. Thanks to database the author identified three categories of enterprises according to the type of political connection being implemented. The first category of enterprises financially supports only political parties, and the second finances only politicians. The third category is composed of those that finance both politicians and political parties. The data show that the enterprises that establish both types of political connections bear more expenses. These enterprises also earn more public contracts. The difference in treatment between these three types of enterprises is only viewed at the level of the number of public contracts obtained. This process allows the author to say that the only advantage linked to the establishment of political connection in Burkina Faso is the profitability linked to government procurements. The data employed do not address the hypothesis of tax reduction as a benefit of a given category.
There is a long-standing debate over the impact of global trade on workers and firms in developing countries. In this paper, Tanaka (2016) investigates the causal effect of exporting on working conditions and firm performance in Myanmar. This analysis draws on a new survey she conducted on Myanmar manufacturing firms from 2013 to 2015. Tanaka uses the rapid opening of Myanmar to foreign trade after 2011 alongside identification strategies that exploit product, geographic and industry variations to obtain causal estimates of the impact of trade. She finds that exporting has large positive impacts on working conditions in terms of improved fire safety, health-care, union recognition, and wages. Her results also indicate that exporting increases firm sales, employment, management practice scores, and the likelihood of receiving a labor audit, which is typically required by foreign buyers.
In this report, Lemos and Scur (2015) provide a basic set of aggregate descriptive data at the country-level collected through the World Management Survey (WMS) waves, including management practices, work-life balance practices, human capital, decentralization and available infrastructure in medium- and large-sized firms in Africa, Asia, and Latin American developing countries. The report also describes the data collection process in great detail. As the database becomes increasingly used by researchers, the authors hope this report can serve as an “expanded methodology and data manual” for the WMS, where they not only detail the data collection process but also include an Appendix on the construction of the sampling frames. This is particularly important for countries and sectors where it was not possible to find a publicly available list, so the authors note the challenges of data collection in these countries and how they approached the solutions to these challenges.
In this paper, Eber and Malmberg (2015) analyze the interaction of supply chain risk and trade patterns. They show theoretically that countries with low supply chain risk can be expected to specialize in goods with a large number of customized inputs, since those goods are most sensitive to disruption. Then, they test this prediction using industry level trade data and find that countries with low supply chain risk disproportionately export risk-sensitive goods.
In this paper, Ciarli, Kofol, and Menon (2015) use a unique dataset that combines spatial detailed information on conflict events and on households' activity, to show a positive and significant correlation between violent conflict and entrepreneurship in Afghanistan. They build spatial and IV identifications to estimate the effect of different measures of conflict on the investment in a range of private economic activities of nearby households. The results consistently show that the level of conflict, its impact, and to a lesser extent its frequency, increase the probability that a household engages in self-employment activities with a lower capital intensity and in activities related to subsistence agriculture, and reduce the probability of investing in higher capital self-employment. Overall, by increasing entrepreneurship, conflict pushes the country towards a regressive structural change. However, the magnitude of most of the effects is quite small. The paper contributes to a literature that, due to data constraints and identification issues, has not yet delivered conclusive evidence.
Knowing why and when young persons want to be entrepreneurs is relevant for development policy in the face of high unemployment. This paper by Adelowo, Egbetokun, and James (2015) presents a descriptive assessment of entrepreneurial interest and activity among a large sample of Nigerian undergraduates. 84% of young Nigerians expressed interest in becoming self-employed but only 28% of them run small businesses alongside schooling. Some of the most important correlates of entrepreneurial interest are gender, entrepreneurial practice and entrepreneurial education. These figures suggest the need to improve and expand entrepreneurial education in tertiary institutions as well as promote a favourable economic atmosphere that can encourage students' engagement in business while studying, especially the female students.
What are the economic channels through which transportation infrastructure affect income? The authors, Asturias, Garcia-Santana, and Ramos (2015) study this question using a model of internal trade in which states trade with each other. In contrast to the previous literature, they do so in a framework that incorporates pro-competitive gains: changes in transportation costs affect the distribution of markups by changing the level of competition that firms face. The authors apply this model to the case of the Golden Quadrilateral(GQ),a large road infrastructure project in India. They discipline the parameters of the model using micro level manufacturing and geospatial data. They find that: i)the project generates large aggregate gains, ii)both standard and pro-competitive gains are quantitatively relevant.
Despite regulatory efforts designed to make it easier for firms to formalize, informality remains extremely high among firms in Sub-Saharan Africa. In most of the region, business registration in a national registry is separate from tax registration. This paper by Campos, Goldstein and Mckenzie (2015) provides initial results from an experiment in Malawi that randomly allocated firms into a control group and three treatment groups: a)a group offered assistance for costless business registration; b) a group offered assistance with costless business registration and (separate) tax registration; and c) a group offered assistance for costless business registration along with an information session at a bank that ended with the offer of business bank accounts. The study finds that all three treatments had extremely large impacts on business registration, with 75 percent of those offered assistance receiving a business registration certificate. The findings offer a cost-effective way of getting firms to formalize in this dimension. However, in common with other studies, information and assistance has a limited impact on tax registration. The paper measures the short-term impacts of formalization on financial access and usage. Business registration alone has no impact for either men or women on bank account usage, savings, or credit. However, the combination of formalization assistance and the bank information session results in significant impacts on having a business bank account, financial practices, savings, and use of complementary financial products.
Using innovation survey data on a sample of UK manufacturing firms, Laursen and Salter (2006) documented a non-monotonous relationship between external search strategies and firm-level innovative performance. Egbetokun, Oluwatope, Adedeye, and Sanni (2015) find partially similar results in a combined sample of Nigerian manufacturing and service firms. A major discrepancy is that external search appears not to matter for radical innovation in our sample. Based on multiple research streams including economics of innovation and development economics, the authors develop and test new hypotheses on sectoral differences and the role of the economic context. They find that in a developing context, a wider range of innovation obstacles implies broader external search and more intense obstacles require deeper search. They explore the implications of these results for management research and theory.
This paper by Atkin, Chaudhry, Chaudry, Khandelwal, and Verhoogen (2014) studies technology adoption in a cluster of soccer-ball producers in Sialkot, Pakistan. The research team invented a new cutting technology that reduces waste of the primary raw material, and allocated the technology to a random subset of producers. Despite the arguably unambiguous net benefits of the technology for nearly all firms, after 15 months take-up remained puzzlingly low. They hypothesize that an improtant reason for the lack of adoption is a misalignment of incentives within firms: the key employees (cutters and printers) are typically paid piece rates, with no incentive to reduce waste, and the new technology slows them down, at least initially. Fearing reductions in their effective wage, employees resist adoption in various ways, including by misinforming owners about the value of the technology. To investigate this hypothesis, the authors implemented a second experiment among the firms to which they originally gave the technology: we offered one cutter and one printer per firm a lump-sum payment, approximately equal to a monthly wage, that was conditional on them demonstrating competence in using the technology in the presence of the owner. This incetive payment, small from the point of view of the firm, had a significant positive effect on adoption. They interpret the results as supportive of the hypothesis that misalignment of incentives within firms is an important barrier to technology adoption in this setting.
Using the third Chadian survey on consumption and informal sector (ECOSIT III), this study aims at assessing the relationship between the profile of entrepreneurs and the performance of SMEs in Chad. The study seeks to answer two main question: (1) what are the entrepreneur's characteristics which correlate more with job creation at the SMEs level? (2) Since Chad became an oil producer in 2003, what is the effect of oil windfall on job creation at the microeconomic level? The authors (Mallaye, Thierry, and Koulke Blandine) have two main findings - (1) three main characteristics correlate with the increase in the number of jobs: experience of the manager/owner, the state of the competition and access to credit, and (2) there is no significant effect of the oil exploitation on job creation in Chad.
A classic result in the microenterprise literature is that easing financial constraints benefits male but not female entrepreneurs. In this paper, Field, Pande, and Rigol (2014) show that easing financial constraints of female entrepreneurs does in fact result in significant growth in household income, but only when income from all enterprises within a household are taken into account. Their analysis draws upon a field experiment conducted with microfinance clients in Kolkata in 2007 (Field, Pande, Papp, and Rigol, 2013). Female microfinance clients were randomly assigned either the classic microfinance contract or a contract that gave them greater repayment flexibility. They show that if they estimate the returns to improved financial access (i.e. being given a more flexible contract) at the enterpise-level then they replicate earlier studies. That is, in households that receive the grace period contract male-owned enterprises but not female-owned enterprises report higher profits observe a significant disparity between returns for male- and female-owned enterprises. However, once they aggregate profits to the household-level they observe that households with a female enterprise are as likely to benefit from improved financial access as households with a male enterprise.
Atkin, Khandelwal and Osman (2017) conduct in this paper, published in the Quarterly Journal of Economics, a randomized experiment that generates exogenous variation in the access to foreign markets for rug producers in Egypt. Combined with detailed survey data, the authors causally identify the impact of exporting on firm performance. Treatment firms report 16–26% higher profits and exhibit large improvements in quality alongside reductions in output per hour relative to control firms. These findings do not simply reflect firms being offered higher margins to manufacture high-quality products that take longer to produce. Instead, the research finds evidence of learning-by-exporting whereby exporting improves technical efficiency. First, treatment firms have higher productivity and quality after controlling for rug specifications. Second,when asked to produce an identical domestic rug using the same inputs and same capital equipment, treatment firms produce higher quality rugs despite no difference in production time. Third, treatment firms exhibit learning curves overtime. Finally, the authors document knowledge transfers with quality increasing most along the specific dimensions that the knowledge pertained to.
Widespread empirical evidence of price discrimination in markets for goods and services suggests that national markets should be viewed as segmented rather than integrated. Yet, this research is almost entirely driven by studies of price setting behaviour in developed countries. Mamello Nchake's thesis extends the empirical literature by providing new evidence on price setting behaviour and product market integration in developing countries using a unique data set of monthly product prices at the retail outlet level or regional level for Lesotho, South Africa, and Botswana over the period 2002 to 2009.
Misallocations of factors of production have the potential to explain a large portion of cross-country differences in productivity (Hsieh and Klenow, 2009). Yet, empirical evidence relating actual differences in firms' productivity to observable policy distortions has been scarce. In this paper, Caprettini (2014) exploits a fiscal reform in Brazil to provide direct empirical evidence of the distortions created by turnover taxes. Turnover taxes are business taxes that, unlike Value Added Taxes, do not allow to deduct the cost of intermediate inputs from the tax base, and that for this reason hit disproportionately industries whose inputs account for a large share of the fiscal value of production. Using a difference-in-difference approach, Caprettini shows that after the reform sectors that rely more on intermediate inputs grow faster in employment, revenue and industrial sales. Firms in the same sectors that were not affected by the reform do not show similar patterns of growth during the period. These results have relevant policy implications, as turnover taxes are very common around the world.
Asturias, Garcia-Santana, and Ramos (2014) investigate the role of transportation infrastructure in explaining resource misallocation and income in India. They extend the endogenous variable markups by Atkeson and Burstein (2008) into a multi-region setting in which asymmetric states t rade with each other. High transportation costs that result from poor infrastructure quality generate misallocation of resources by increasing dispersion in market power across firms. Using a rich micro-level dataset constructed from manufacturing and geospatial data, the authors find preliminary evidence that is consistent with their theory. Using the construction of the Golden Quadrilateral as a natural experiment, they find that prices declined by 20% in districts crossed by this road. They calibrate the model and simulate an improvement in Indian road quality. They find the aggregate gains for improved road quality and decompose these gains into Ricardian and pro-competitive components.
Over the last decade the World Management Survey (WMS) has collected firm-level management practices data across multiple sectors and countries. Bloom, Lemos, Sadun, Scur, and Van Reenen (2014) developed the survey to try to explain the large and persistent TFP differences across firms and countries. This review paper discusses what has been learned empirically and theoretically from the WMS and other recent work on management practices. Their preliminary results suggest that about a quarter of cross-country and within-country TFP gaps can be accounted for by management practices. Management seems to matter both qualitatively and quantitatively. Competition, governance, human capital and informational frictions help account for the variation in management.
Using detailed data from garment factories in Bangalore, India, Adhvaryu, Kala and Nyshadham (2014) estimate large, negative impacts of temperature on productive efficiency (actual over target output). The introduction of LED lighting, which emits less heat than standard lighting, attenuates the temperature-productivity gradient by 75 percent. Their estimates suggest that productivity returns to LEDs are more than four times larger than the energy savings, significantly shifting firms’ cost-benefit calculations in favour of adoption. They find no evidence of contemporaneous impacts of temperature on worker attendance, indicating that labour supply is not a primary mechanism of impact between temperature and productivity.
This paper extends the microeconomic empirical evidence on price setting in emerging economies using price and outlet survey data for Lesotho. Edwards, Nchake and Sundaram (2014) explore how price-setting behaviour differs by outlet size, location and type, and analyse various sources of price changes and price rigidities. They find that prices change more often in large outlets and less frequently in outlets where labour costs are an important component of costs. Implicit contracts with consumers and co-ordination failure in the setting of prices across competitors rank highly as sources of price rigidity, while menu costs and explicit contracts are found to be relatively unimportant. These results corroborate findings in advanced economies. However, contrary to theoretical expectations and other empirical findings, no consistent relationship between the frequency of price changes and the perceived competition in the market is found.
This paper by Edwards and Nchake (2015), published in the South African Journal of Economics, documents some of the main features of price-setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. These features include the frequency, size, duration and synchronisation of price changes. In addition, the paper compares price-setting behaviour in Lesotho and South Africa using a comparable set of products. The findings reveal considerable heterogeneity in price-setting behaviour across products, outlets, locations and time. Variations in inflation are strongly correlated with the average size of price changes, but rising inflation raises the frequency of price increases and reduces the frequency of price decreases. Price decreases constitute an important determinant of inflation movements. Surprisingly, the frequency and size of price changes in Lesotho differ substantially from those in South Africa, despite the presence of common retail chains and their joint membership in a customs union and common monetary area. These findings open up opportunities for further research into the sources of heterogeneity across products and Lesotho and South Africa in the setting of prices.
Using data collected from a sample of MSMEs located in urban areas of five major districts in Zambia, this paper investigates the existence and size of switching costs among Micro, Small and Medium Enterprises (MSMEs) when borrowing formal bank credit. Mphuka, Simumba and Banda (2013) find that MSMEs' selection of a 'main-bank' does not persist over time, signalling the absence of switching costs. Switching main banks also had no effect on lending interest rates – nor do banks use discounts on lending interest rates to attract borrowers from competitor banks. These results point to the existence of asymmetric information as the main explanation for the occurrence of high interest rates and low volume of credit allocated to MSMEs. The researchers suggest encouraging ‘relationship banking’ between commercial banks and MSMEs as a way of breaking down information barriers in order to reduce the upward mispricing of interest rates offered to these firms.
This policy paper by Blumenstock, Callen and Ghani (2013) shows, using a randomized controlled trial with a large Afghan firm, that paying salaries using mobile money instead of physical cash produces significant cost savings for the employer, boosts demand for the services of the mobile network operator, and increases employees’ propensity to save part of their incomes. The authors also discuss possible policy implications for stakeholders interested in expanding the effectiveness of mobile salary payments, including the need to prioritize roll-out in less remote areas, expand two-­way payment flows such as bill payments and vendor payments, and develop value-added functions to provide employers and third-­party funders with enhanced auditing capabilities.
Sanchez de la Sierra (2017) gathers panel data on armed actors in 650 locations of Eastern Congo to explain the emergence and trajectories of Tilly (1985)’s essential functions of the state. A demand shock for coltan, a bulky commodity, leads violent actors to organize monopolies of violence, tax output, and provide protection at coltan-producing locations. A similar shock for gold, which can be concealed to avoid taxes, does not. Instead, it leads armed actors to form monopolies of violence in the villages in which gold miners spend their income, and to introduce consumption and wealth taxes, as well as fiscal and legal administrations to reduce evasion. This process benefits the population, only if such functions are embodied by a popular militia.
Ghani, Grover and Kerr (2013) use a difference-in-difference estimation strategy to compare non-nodal districts based on their distance from the highway system. For the organized portion of the manufacturing sector, the Golden Quadrilateral project led to improvements in both urban and rural areas of non-nodal districts located 0–10 km from the Golden Quadrilateral. The most important difference appears to be the greater activation of urban areas near the nodal cities and rural areas in remote locations along the Golden Quadrilateral network. For the unorganized sector, no material effects are found from the Golden Quadrilateral upgrades in either setting. These findings suggest that in the time frames that we can consider—the first five to seven years during and after upgrades—the economic effects of major highway projects contribute modestly to the migration of the organized sector out of Indian cities, but are unrelated to the increased urbanization of the unorganized sector.
In this paper, published in The Economic Journal, Kerr, Grover and Ghani (2015) investigate the impact of transport infrastructure on the organisation and efficiency ofmanufacturing activity. The Golden Quadrilateral (GQ) project upgraded a central highway networkin India. Manufacturing activity grew disproportionately along the network. These findings hold instraight-line IV frameworks and are not present on a second highway that was planned to be upgraded atthe same time as GQ but subsequently delayed. Both entrants and incumbents facilitated the outputgrowth, with scaling among entrants being important. The upgrades facilitated better industrial sortingalong the network and improved the allocative efficiency of industries initially positioned on GQ.
Informality is pervasive in developing countries. In Bangladesh, the majority of firms are informal and as such they might not have access to prime markets, while lowering the tax base. De Giorgi and Rahman (2013) implemented an information campaign on registration, including both the step-by-step procedures and the potential benefits from registration. They find that the treatment made firms more aware of the procedures, but had no impact on actual registration. The results point toward potentially low benefits and high indirect costs of registration as the main barriers to formality (e.g. access to markets, taxation, labor and product regulations).
Kerr, Wittenberg and Arrow (2013) use the Quarterly Employment Survey conducted by Statistics South Africa to explore how South African enterprises create and destroy jobs, shedding light on many of the policy questions that are relevant in a high unemployment society like South Africa. They find that job creation and destruction rates are similar to those found in OECD countries. There is little evidence that labour legislation creates rigidities that prevent firms from hiring or firing workers. They also find that larger firms are better net creators of jobs than small firms and that net job creation rates are negative in manufacturing, consistent with work using household surveys.