How Do Electricity Shortages Affect Productivity? Evidence from India

Endemic blackouts are a particularly salient example of how poor infrastructure might reduce growth in developing economies. As a case study, the authors analyze how Indian textile plants respond to weekly “power holidays". They then study how electricity shortages affect all Indian manufacturers, using an instrument based on hydroelectricity production and a hybrid Leontief/Cobb-Douglas production function model. Shortages reduce average output by about five percent, but because most inputs can be stored during outages, productivity losses are much smaller. Plants without generators have much larger losses, and because of economies of scale in generator capacity, shortages more severely affect small plants.

Authors

Hunt Allcott

New York University

Allan Collard-Wexler

Duke University

Stephen D. O'Connell

Emory University