Electricity and Firm Productivity: A General-Equilibrium Approach

55 Pages Posted: 5 May 2020 Last revised: 31 Dec 2021

See all articles by Stephie Fried

Stephie Fried

Carleton College

David Lagakos

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2020

Abstract

The lack of reliable electricity in the developing world is widely viewed by policymakers as a major constraint on firm productivity. Yet most empirical studies find modest short-run effects of power outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general equilibrium effects of power outages on productivity. The model captures the key features of how firms acquire electricity in the developing world, in particular the rationing of grid electricity and the possibility of self-generated electricity at higher cost. Power outages lower productivity in the model by creating idle resources, by depressing the scale of incumbent firms and by reducing entry of new firms. Consistent with the empirical literature, the model predicts that the short-run partial-equilibrium effects of eliminating outages are small. However, the long-run general-equilibrium effects are many times larger, supporting the view that eliminating outages is an important development objective.

Suggested Citation

Fried, Stephie and Lagakos, David, Electricity and Firm Productivity: A General-Equilibrium Approach (May 2020). NBER Working Paper No. w27081, Available at SSRN: https://ssrn.com/abstract=3592158

Stephie Fried (Contact Author)

Carleton College ( email )

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David Lagakos

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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