Deregulation, Misallocation, and Size: Evidence from India

53 Pages Posted: 18 Dec 2012 Last revised: 21 Feb 2014

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 21, 2014

Abstract

This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm size dynamics and reallocation of resources within industries. Following deregulation, resource misallocation declines and the left-hand tail of the firm size distribution thickens significantly, suggesting increased entry by small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The reallocation of market shares toward a small number of large firms and a large number of small firms is characterized as the “shrinking middle” in Indian manufacturing. Small- and medium-sized firms may continue to face constraints in their attempts to grow.

JEL Classification: F43, G31, G38, O12, O14, L10

Suggested Citation

Alfaro, Laura and Chari, Anusha, Deregulation, Misallocation, and Size: Evidence from India (February 21, 2014). Harvard Business School BGIE Unit Working Paper No. 13-056. Available at SSRN: https://ssrn.com/abstract=2190963 or http://dx.doi.org/10.2139/ssrn.2190963

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

McColl Building
Chapel Hill, NC 27599-3490
United States

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