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The Missing "Missing Middle"

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  • Chang-Tai Hsieh
  • Benjamin A. Olken

Abstract

Although a large literature seeks to explain the “missing middle” of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no “missing middle” in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19966.

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Date of creation: Mar 2014
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Publication status: published as Chang-Tai Hsieh & Benjamin A. Olken, 2014. "The Missing "Missing Middle"," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 89-108, Summer.
Handle: RePEc:nbr:nberwo:19966

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  1. James Tybout, 1999. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Development and Comp Systems, EconWPA 9906001, EconWPA, revised 10 Jun 1999.
  2. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," Working Papers, Economic Growth Center, Yale University 932, Economic Growth Center, Yale University.
  3. Garicano, Luis & Lelarge, Claire & Van Reenen, John, 2013. "Firm Size Distortions and the Productivity Distribution: Evidence from France," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9495, C.E.P.R. Discussion Papers.
  4. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1329-1372, November.
  5. Jan De Loecker & Frederic Warzynski, 2009. "Markups and firm-level export status," NBER Working Papers, National Bureau of Economic Research, Inc 15198, National Bureau of Economic Research, Inc.
  6. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, Elsevier, vol. 15(3), pages 482-511, June.
  7. Timothy Besley & Robin Burgess, 2002. "Can labour regulation hinder economic performance? Evidence from India," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3779, London School of Economics and Political Science, LSE Library.
  8. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, Elsevier, vol. 93(5-6), pages 766-775, June.
  9. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  10. Claudia Sánchez-Vela & Jorge N. Valero-Gil, 2011. "The Effect of Firm-Size Dependent Policies on the Economy: The Case of the Repecos Law in Mexico," IDB Publications, Inter-American Development Bank 80642, Inter-American Development Bank.
  11. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, Oxford University Press, Oxford University Press, vol. 128(2), pages 669-723.
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Cited by:
  1. Hunt Allcott & Allan Collard-Wexler & Stephen D. O'Connell, 2014. "How Do Electricity Shortages Affect Productivity? Evidence from India," NBER Working Papers, National Bureau of Economic Research, Inc 19977, National Bureau of Economic Research, Inc.

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