IDEAS home Printed from https://ideas.repec.org/a/aea/jecper/v28y2014i3p89-108.html
   My bibliography  Save this article

The Missing "Missing Middle"

Author

Listed:
  • 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 explaining "the missing middle" 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.

Suggested Citation

  • 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:aea:jecper:v:28:y:2014:i:3:p:89-108
    Note: DOI: 10.1257/jep.28.3.89
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.28.3.89
    Download Restriction: no

    File URL: http://www.aeaweb.org/jep/app/2803/28030089_app.pdf
    Download Restriction: no

    File URL: http://www.aeaweb.org/jep/ds/2803/28030089_ds.zip
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

    Other versions of this item:

    References listed on IDEAS

    as
    1. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
    2. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
    3. Chang-Tai Hsieh & Peter J. Klenow, 2014. "The Life Cycle of Plants in India and Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1035-1084.
    4. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-2471, October.
    5. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    6. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 91-134.
    7. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," American Economic Review, American Economic Association, vol. 96(2), pages 388-393, May.
    8. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, vol. 15(3), pages 482-511, June.
    9. 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, vol. 128(2), pages 669-723.
    10. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 423-423.
    11. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
    12. Michael Kremer & Jean Lee & Jonathan Robinson & Olga Rostapshova, 2013. "Behavioral Biases and Firm Behavior: Evidence from Kenyan Retail Shops," American Economic Review, American Economic Association, vol. 103(3), pages 362-368, May.
    13. 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 (Working Papers) 4549, Inter-American Development Bank.
    14. 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 (Working Papers) 80642, Inter-American Development Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:jecper:v:28:y:2014:i:3:p:89-108. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael P. Albert). General contact details of provider: http://edirc.repec.org/data/aeaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.