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Where are the Real Bottlenecks? A Lagrangian Approach to Identifying Constraints on Growth from Subjective Survey Data

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  • Wendy Carlin
  • Mark Schaffer
  • Paul Seabright

Abstract

We use firm-level survey data from over 20,000 firms in about 60 countries to identify constraints on the growth of firms. We develop a Lagrangian approach and measure the cost of different constraints by using managers' answers to survey questions on what aspects of their external environment inhibit the operation and growth of their firm. Our model reveals that, contrary to the common practice in much of the existing literature on this question, the importance of an obstacle to growth is not, except under very restrictive assumptions, measured by the coefficient on the reported level of the obstacle in a growth regression. This parameter estimate is typically contaminated by the endogeneity of public good supply at a country level (better performing countries have higher levels of supply), and by the endogeneity of demand for public goods at a firm level (better performing firms need higher levels of public good inputs). We illustrate these biases for a number of obstacles to growth, and argue that such biases can account for anomalous findings in the literature. A priori arguments suggest that the subjective evaluation of finance constraints is different from other constraints and this too is reflected in the data. We show how the importance of different constraints varies across countries and how the cost of a constraint depends on the characteristics of the firm.

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File URL: http://www.sml.hw.ac.uk/downloads/cert/wpa/2006/dp0604.pdf
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Bibliographic Info

Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0604.

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Date of creation: 2006
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Handle: RePEc:hwe:certdp:0604

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Keywords: public goods; constraints on growth; infrastructure; finance; institutions; subjective data;

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References

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  1. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2006. "How important are financing constraints ? The role of finance in the business environment," Policy Research Working Paper Series 3820, The World Bank.
  2. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
  3. Goldberg, Itzhak & Radulovic, Branko & Schaffer, Mark, 2005. "Productivity, ownership, and the investment climate : international lessons for priorities in Serbia," Policy Research Working Paper Series 3681, The World Bank.
  4. Sendhil Mullainathan & Marianne Bertrand, 2001. "Do People Mean What They Say? Implications for Subjective Survey Data," American Economic Review, American Economic Association, vol. 91(2), pages 67-72, May.
  5. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, 02.
  6. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank.
  7. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2005. "Investment Climate and Firm Performance in Developing Economies," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 1-31, October.
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Cited by:
  1. Deininger, Klaus & Jin, Songqing & Sur, Mona, 2007. "Sri Lanka's Rural Non-Farm Economy: Removing Constraints to Pro-Poor Growth," World Development, Elsevier, vol. 35(12), pages 2056-2078, December.
  2. Tidiane Kinda & Patrick Plane & Marie‐Ange Véganzonès‐Varoudakis, 2011. "Firm Productivity And Investment Climate In Developing Countries: How Does Middle East And North Africa Manufacturing Perform?," The Developing Economies, Institute of Developing Economies, vol. 49(4), pages 429-462, December.
  3. Seker, Murat & Yang, Judy S., 2012. "How bribery distorts firm growth : differences by firm attributes," Policy Research Working Paper Series 6046, The World Bank.
  4. Gelb, Alan & Ramachandran, Vijaya & Shah, Manju Kedia & Turner, Ginger, 2007. "What matters to African firms ? the relevance of perceptions data," Policy Research Working Paper Series 4446, The World Bank.
  5. Wendy Carlin & Mark Schaffer & Paul Seabright, 2012. "Soviet power plus electrification: what is the long-run legacy of communism?," Working Papers 43-2012, Macerata University, Department of Studies on Economic Development (DiSSE), revised Jun 2012.
  6. Aidis, Ruta & Estrin, Saul & Mickiewicz, Tomasz, 2009. "Entrepreneurial Entry: Which Institutions Matter?," IZA Discussion Papers 4123, Institute for the Study of Labor (IZA).
  7. Rijkers, Bob & Söderbom, Måns & Loening, Josef L., 2010. "A Rural-Urban Comparison of Manufacturing Enterprise Performance in Ethiopia," World Development, Elsevier, vol. 38(9), pages 1278-1296, September.
  8. Commander, Simon & Nikoloski, Zlatko, 2010. "Institutions and Economic Performance: What Can Be Explained?," IZA Discussion Papers 5247, Institute for the Study of Labor (IZA).
  9. Hanusch, Marek, 2012. "The doing business indicators, economic growth and regulatory reform," Policy Research Working Paper Series 6176, The World Bank.
  10. Hallward-Driemeier, Mary & Aterido, Reyes, 2009. "Comparing Apples with....Apples : how to make (more) sense of subjective rankings of constraints to business," Policy Research Working Paper Series 5054, The World Bank.
  11. Mitra, Pradeep & Muravyev, Alexander & Schaffer, Mark E, 2008. "Convergence in Institutions and Market Outcomes: Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition Economies," IZA Discussion Papers 3863, Institute for the Study of Labor (IZA).
  12. Simon Commander & Zlatko Nikoloski, 2010. "Institutions and economic performance: What can be explained?," Working Papers 121, European Bank for Reconstruction and Development, Office of the Chief Economist.
  13. Commander, Simon & Svejnar, Jan, 2007. "Do Institutions, Ownership, Exporting and Competition Explain Firm Performance? Evidence from 26 Transition Countries," IZA Discussion Papers 2637, Institute for the Study of Labor (IZA).
  14. Álvarez, Begoña & Vera-Hernández, Marcos, 2013. "Exploiting subjective information to understand impoverished children's use of health care," Journal of Health Economics, Elsevier, vol. 32(6), pages 1194-1204.
  15. Rijkers, Bob & Soderbom, Mans & Loening, Josef, 2009. "Mind the gap ? a rural-urban comparison of manufacturing firms," Policy Research Working Paper Series 4946, The World Bank.

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