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Small Scale Reservation Laws and the Misallocation of Talent

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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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  • Manuel García-Santana & Josep Pijoan-Mas, 2010. "Small Scale Reservation Laws and the Misallocation of Talent," Working Papers wp2010_1010, CEMFI.
  • Handle: RePEc:cmf:wpaper:wp2010_1010
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    Cited by:

    1. François Gourio & Nicolas Roys, 2014. "Size‐dependent regulations, firm size distribution, and reallocation," Quantitative Economics, Econometric Society, vol. 5, pages 377-416, July.
    2. Goyette, Jonathan & Gallipoli, Giovanni, 2015. "Distortions, efficiency and the size distribution of firms," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 202-221.
    3. Benjamin Bridgman & Michael Maio & James A. Schmitz, 2012. "What ever happened to the Puerto Rican sugar manufacturing industry?," Staff Report 477, Federal Reserve Bank of Minneapolis.
    4. 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.
    5. Allub, Lian & Erosa, Andrés, 2019. "Financial frictions, occupational choice and economic inequality," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 63-76.
    6. Allub, Lian, 2015. "Asymmetric effects of trade and FDI: South America versus Europe," Economics Working Papers MWP2015/16, European University Institute.
    7. Manuel García-Santana, 2013. "Foreign Firms, Distribution of Income, and the Welfare of Developing Countries," 2013 Meeting Papers 1044, Society for Economic Dynamics.
    8. Lopez-Martin, Bernabe, 2019. "Informal Sector Misallocation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(8), pages 3065-3098, December.
    9. Siddharth Kothari, 2014. "The Size Distribution of Manufacturing Plants and Development," IMF Working Papers 2014/236, International Monetary Fund.

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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