Achieving Scale Collectively

Working Paper
Published on 31 July 2020

Abstract

Technology is often embodied in expensive and indivisible capital goods. As a result, the small scale of firms in developing countries could hinder investment and productivity. Bassi et al. (2020) argue that market interactions between small firms can alleviate this concern. They design and implement a survey of manufacturing firms in Uganda, which uncovers an active rental market for large machines among small firms. They then build an equilibrium model of firm behaviour and estimate it with their data. The model shows that the rental market is quantitatively important for mechanisation and productivity since it mitigates imperfections in other markets. The estimated transaction costs in the rental market are relatively small, which motivates the researchers to redefine firm boundaries as a group of workers sharing the same machines. Doing so, the average firm size in their data increases by 77%. They conclude that through the rental market small firms achieve scale collectively

Authors

Vittorio Bassi

University College London

Raffaela Muoio

BRAC Uganda

Tommaso Porzio

Columbia University

Ritwika Sen

International Growth Centre

Esau Tugume

BRAC Uganda