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Small Scale Reservation Laws and the Misallocation of Talent

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  • Josep Pijoan-Mas

    (CEMFI and CEPR)

  • Manuel Garcia-Santana

    (CEMFI)

Abstract

In this paper we quantify the effects of the Small Scale Reservation Laws in India on the aggregate productivity, aggregate output and welfare of the Indian economy. To this end, we extend the span-of-control model by Lucas (1978) into a multi-sector setting and embed it into the neo-classical growth model. Our main theoretical contribution is to model the occupational choice within this framework. We fully calibrate our model to data from India for the early 2000's. We find that lifting the Small Scale Reservation Laws would increase output per worker by 3.2 percent, capital per worker by 7.1 percent and aggregate TFP by 0.8 percent. Within manufacturing, output per worker would increase by 9.8 percent, capital per worker by 12.5 percent and TFP by 3.6 percent. Average firm size in manufacturing would raise from 19 to 69 employees. These are large numbers given that the size of the restricted sector is only 12 percent of manufacturing value added and 3 percent of total GDP. However, this conspicuous type of size-dependent policy cannot account for the large gap in manufacturing TFP existing between the US and India.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 176.

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Date of creation: 2011
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Handle: RePEc:red:sed011:176

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  1. Margarida Duarte & Diego Restuccia, 2007. "The Role of the Structural Transformation in Aggregate Productivity," Working Papers, University of Toronto, Department of Economics tecipa-300, University of Toronto, Department of Economics.
  2. Andres Erosa, 2001. "Financial Intermediation and Occupational Choice in Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 303-334, April.
  3. Tatyana Koreshkova & Diego Restuccia & Andres Erosa, 2007. "How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality," 2007 Meeting Papers, Society for Economic Dynamics 782, Society for Economic Dynamics.
  4. Jonathan Goyette & Giovanni Gallipoli, 2012. "Distortions, Efficiency and the Size Distribution of Firms," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 12-06, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  5. repec:bla:restud:v:77:y:2010:i:4:p:1421-1449 is not listed on IDEAS
  6. Gary D. Hansen & Edward C. Prescott, 2002. "Malthus to Solow," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 1205-1217, September.
  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1741-1779, September.
  8. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
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Cited by:
  1. Luis Garicano & Claire LeLarge & John Van Reenen, 2013. "Firm Size Distortions and the Productivity Distribution: Evidence from France," NBER Working Papers 18841, National Bureau of Economic Research, Inc.
  2. Benjamin Bridgman & Michael Maio & James A. Schmitz, Jr., 2012. "What ever happened to the Puerto Rican sugar manufacturing industry?," Staff Report, Federal Reserve Bank of Minneapolis 477, Federal Reserve Bank of Minneapolis.
  3. Jonathan Goyette & Giovanni Gallipoli, 2012. "Distortions, Efficiency and the Size Distribution of Firms," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 12-06, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.

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