Where are the Real Bottlenecks? A Lagrangian Approach to Identifying Constraints on Growth from Subjective Survey Data
AbstractWe 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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Bibliographic InfoPaper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0604.
Date of creation: 2006
Date of revision:
public goods; constraints on growth; infrastructure; finance; institutions; subjective data;
Find related papers by JEL classification:
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
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- 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.
- Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2008. "How Important Are Financing Constraints? The Role of Finance in the Business Environment," World Bank Economic Review, World Bank Group, vol. 22(3), pages 483-516, November.
- 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.
- Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007.
"Private credit in 129 countries,"
Journal of Financial Economics,
Elsevier, vol. 84(2), pages 299-329, May.
- Itzhak Goldberg & Branko Radulovic & Mark E. Schaffer, 2005.
"Productivity, Ownership and the Investment Climate: International Lessons for Priorities in Serbia,"
CERT Discussion Papers
0503, Centre for Economic Reform and Transformation, Heriot Watt University.
- 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.
- 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.
- 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.
- 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.
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