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Un-Incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka

Author

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  • Kumari Ranpati Dewage Thilini Sumudu
  • Chen Shawn Xiaoguang
  • Tang Sam Hak Kan

    (Business School, The University of Western Australia, Perth, Australia)

Abstract

Un-incorporated firms are usually found less productive than their incorporated counterparts. However, little is known about the misallocation conditional on firms’ incorporation status and their productivity. This paper investigates the resource misallocation across un-incorporated firms and gauges the consequent aggregate productivity loss in comparison with their incorporated counterparts. We examine the question by using firm-level survey data from Sri Lanka’s manufacturing sector for 2005–2017 that provide unique information about firms’ corporation status. Our findings suggest that misallocation is more severe in unincorporated firms than in incorporated ones, leading to extra 42 % aggregate TFP loss to the former. By comparing the sources of misallocation between the two types of firms, we find capital is more misallocated relative to output and there is a stronger positive correlation between firm-specific distortion and productivity across the unincorporated firms. Our findings suggest that the un-incorporated firms suffer additional productivity loss at the aggregate level due to misallocation.

Suggested Citation

  • Kumari Ranpati Dewage Thilini Sumudu & Chen Shawn Xiaoguang & Tang Sam Hak Kan, 2023. "Un-Incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(2), pages 999-1035, June.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:2:p:999-1035:n:9
    DOI: 10.1515/bejm-2022-0107
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    More about this item

    Keywords

    firm-level distortion; misallocation; Sri Lanka; total factor productivity; unincorporated firm;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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