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The reservation laws in India and the misallocation of production factors

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  • García-Santana, Manuel
  • Pijoan-Mas, Josep

Abstract

The Small Scale Reservation Laws (SSRL) in India are a unique case of firm-level size restrictions. We quantify their aggregate productivity costs by use of a span-of-control model extended into a multisector setting. The reallocation of top managers away from the distorted sector partly offsets the effect of the distortions. We calibrate our model using plant level data from India. Lifting the SSRL increases output by 6.8% in manufacturing and 2% in the overall economy, and TFP by 2% and 0.75% respectively. While large, the costs of this size-dependent policy cannot account for the existing gap in manufacturing TFP between the US and India.

Suggested Citation

  • García-Santana, Manuel & Pijoan-Mas, Josep, 2014. "The reservation laws in India and the misallocation of production factors," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 193-209.
  • Handle: RePEc:eee:moneco:v:66:y:2014:i:c:p:193-209
    DOI: 10.1016/j.jmoneco.2014.04.017
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    Cited by:

    1. Enrique Moral-Benito, 2018. "Growing by learning: firm-level evidence on the size-productivity nexus," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 9(1), pages 65-90, March.
    2. José Asturias & Manuel García-Santana & Roberto Ramos, 2016. "Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India," Working Papers 907, Barcelona Graduate School of Economics.
    3. Schelkle, Thomas, 2017. "Measuring Factor Misallocation: General Methods and Evidence on the Great Recession," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168105, Verein für Socialpolitik / German Economic Association.
    4. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    5. Jan Grobovsek, 2016. "Managerial Delegation, Law Enforcement, and Aggregate Productivity," ESE Discussion Papers 271, Edinburgh School of Economics, University of Edinburgh.
    6. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2017. "Managers and Productivity Differences," Working Papers wp2018_1710, CEMFI.
    7. HOSONO Kaoru & TAKIZAWA Miho & TSURU Kotaro, 2017. "Size-dependent Policy and Firm Growth," Discussion papers 17070, Research Institute of Economy, Trade and Industry (RIETI).
    8. TSURUTA Daisuke, 2017. "SME Policies as a Barrier to Growth of SMEs," Discussion papers 17046, Research Institute of Economy, Trade and Industry (RIETI).
    9. Boehm, Johannes & Dhingra, Swati & Morrow, John, 2016. "Swimming upstream: input-output linkages and thedirection of product adoption," LSE Research Online Documents on Economics 66418, London School of Economics and Political Science, LSE Library.
    10. Ghani,Syed Ejaz & Grover,Arti & Kerr,Sari & Kerr,William Robert, 2016. "Will market competition trump gender discrimination in India ?," Policy Research Working Paper Series 7814, The World Bank.
    11. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    12. Wenbiao Cai, 2015. "Technology, Policy Distortions and the Rise of Large Farms," Departmental Working Papers 2015-03, The University of Winnipeg, Department of Economics.
    13. Manuel García-Santana & Roberto Ramos, 2015. "Distortions and the size distribution of plants: evidence from cross-country data," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(3), pages 279-312, August.
    14. Thomas Schelkle, 2016. "General Methods for Measuring Factor Misallocation," Working Paper Series in Economics 87, University of Cologne, Department of Economics.
    15. Joshua Wilde & Ishani Tewari, 2014. "Multiproduct Firms, Product Scope and Productivity: Evidence from India’s Product Reservation Policy," Working Papers 0214, University of South Florida, Department of Economics.
    16. Le, Kien, 2018. "Land Use Restrictions, Misallocation in Agriculture, and Aggregate Productivity in Vietnam," MPRA Paper 90797, University Library of Munich, Germany.
    17. Lucciano Villacorta & Josep Pijoan-Mas & Manuel Garcia-Santana, 2015. "Investment Demand and Structural Change," 2015 Meeting Papers 1207, Society for Economic Dynamics.
    18. Roberto Ramos & Manuel García-Santana & Jose Asturias, 2014. "Misallocation, Internal Trade, and the Role of Transportation Infrastructure," 2014 Meeting Papers 1035, Society for Economic Dynamics.
    19. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2017. "Managers and Productivity Differences," Working Papers wp2017_1710, CEMFI.
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    21. Markus Poschke, 2018. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 1-41, July.
    22. Gollin, D. & Udry, C., 2018. "Heterogeneity, Measurement Error, and Misallocation: Evidence from African Agriculture," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277279, International Association of Agricultural Economists.
    23. Kevin Donovan, 2014. "Subsistence Entrepreneurs and Misallocation," 2014 Meeting Papers 771, Society for Economic Dynamics.
    24. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    25. Manuel García-Santana, 2013. "Foreign Firms, Distribution of Income, and the Welfare of Developing Countries," 2013 Meeting Papers 1044, Society for Economic Dynamics.

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