Competition, Financial Constraints and Misallocation: Plant-level Evidence from Indian Manufacturing

Research Note
Published on 21 January 2019


A commonly held and highly intuitive view is that intensified competition will improve the allocation of resources in an economy, by shifting resources to more productive firms. When firms are financially constrained however, increased competition undermines firms’ profitability, and thereby their capacity to accumulate capital through internally financed investment. This way, competition may not improve resource misallocation after all.