Measuring Quality in India's Brick Industry

Authors
Daniel Keniston

The literature on productivity dispersion has investigated a wide variety of underlying causes for the observed variance of firm productivity: credit constraints, market failures, poor management, etc. This project will examine what may be a central underlying channel of productivity dispersion: product quality. By explicitly quantifying how much product quality explains differences in revenue productivity, the researcher seeks to better understand the underlying causes of this dispersion, as well as investigate the determinants of firms' choices of quality.

The study will be carried out in the context of a broader study of the Indian clay brick industry, a sector ideally suited to this line of enquiry. Extensive interviews with brick firm owners suggest that variation in the quality of bricks is an important determinant of the final price and quantity sold. Many of the actions taken to maximize brick quality are difficult to observe, such as the care with which bricks are stacked in the kiln, or how completely the kiln is sealed in order to optimize airflow. These, and other unobservables, may allow certain firms to obtain premium prices for their products which using essentially the same inputs as others. The researcher will therefore implement a methodology for accurate measurement of the quality of bricks that involves testing the bricks for compressive force and water absorption. In future project rounds the results of quality testing will be randomly released to certain firms, along with the averages of their neighbor’s results, in order to test the effect of information on improving firm outcomes. 

The findings from this project will have significant policy implications. If the misallocation of resources (i.e. the situation where firms don't operate at a profit-maximizing output level by not making the most efficient use of inputs available) observed among firms in many developing countries is due to a lack of access to capital, then interventions such as loan guarantees or microcredit may be effective. On the other hand, if misallocation is due to market power, poor policies or bad management, totally different sets of policies designed to resolve these deficiencies would be required. Without accounting for differences in product quality across firms it is impossible to robustly identify the underlying mechanisms driving productivity dispersion across firms, and thus design effective industrial policy.

Daniel Keniston has also completed a prior PEDL-funded project titled What Causes Dispersion in Revenue and Output Across Firms? The Brick Industry in India. 

Authors

Daniel Keniston

Louisiana State University