Measuring and Modelling Market Frictions and their Interaction as a Determinant of Aggregate Sector Performance

There are many frictions in the markets of developing countries, such as information problems, incomplete markets, transaction costs including spatial separation, and inefficient industrial organization of financial service providers which may lead to inefficient outcomes. This project explores relevant policies that enable markets to deliver both efficiency and aggregate private sector performance in economies facing such frictions, particularly focusing on the role of small and medium enterprises (SMEs) in the larger general equilibrium environment.

By relying on extensive and unique data collection for small and medium enterprises in Thailand, the analysis will shed light on the lifecycle of firms and their impact on economic growth, as well as the evolution of productivity and the methods to enhance it. The data collection will provide a useful model for Low-Income Countries (LICs) illustrating the interaction of data and models in policy recommendations.

The overall framework of this project, including data collection, analysis, and modelling, can be taken to LICs beyond Thailand as part of applications that address how to best measure productivity; how real and financial considerations are intertwined in both house and firm life cycles; how to estimate obstacles to trade and disentangle their interaction with market structure and regulation; and how to combine micro-data on key parameters and decision-making with macro modelling to understand the evolution of private sector performance and to conduct general equilibrium counterfactual policy evaluation. 


Robert M. Townsend

Massachusetts Institute of Technology