Small Scale Reservation Laws and the Misallocation of Talent

41 Pages Posted: 9 Feb 2011

See all articles by Manuel García-Santana

Manuel García-Santana

Universitat Pompeu Fabra

Josep Pijoan-Mas

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Date Written: February 2011

Abstract

In this paper we quantify the effects of the Small Scale Reservation Laws in India on the aggregate productivity, aggregate output and welfare of the Indian economy. To this end, we extend the span-of-control model by Lucas (1978) into a multi-sector setting and embed it into the neo-classical growth model. Our main theoretical contribution is to model the occupational choice within this framework. We fully calibrate our model to data from India for the early 2000's. We find that lifting the Small Scale Reservation Laws would increase output per worker by 3.2 percent, capital per worker by 7.1 percent and aggregate TFP by 0.8 percent. Within manufacturing, output per worker would increase by 9.8 percent, capital per worker by 12.5 percent and TFP by 3.6 percent. Average firm size in manufacturing would raise from 19 to 69 employees. These are large numbers given that the size of the restricted sector is only 12 percent of manufacturing value added and 3 percent of total GDP. However, this conspicuous type of size-dependent policy cannot account for the large gap in manufacturing TFP existing between the US and India.

Keywords: Firm size, Multisector growth models, Occupational choice, TFP differences

JEL Classification: E23, J24, L11, L26, O41, O47

Suggested Citation

García-Santana, Manuel and Pijoan-Mas, Josep, Small Scale Reservation Laws and the Misallocation of Talent (February 2011). CEPR Discussion Paper No. DP8242, Available at SSRN: https://ssrn.com/abstract=1758453

Manuel García-Santana (Contact Author)

Universitat Pompeu Fabra ( email )

Josep Pijoan-Mas

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
530
PlumX Metrics