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Small Scale Reservation Laws And The Misallocation Of Talent

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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Paper provided by CEMFI in its series Working Papers with number wp2010_1010.

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Date of creation: Dec 2010
Date of revision:
Handle: RePEc:cmf:wpaper:wp2010_1010
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  1. Margarida Duarte & Diego Restuccia, 2009. "The Role of the Structural Transformation in Aggregate Productivity," Working Papers tecipa-348, University of Toronto, Department of Economics.
  2. repec:bla:restud:v:77:y:2010:i:4:p:1421-1449 is not listed on IDEAS
  3. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
  4. Goyette, Jonathan & Gallipoli, Giovanni, 2015. "Distortions, efficiency and the size distribution of firms," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 202-221.
  5. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  6. Gary D. Hansen & Edward C. Prescott, 1998. "Malthus to Solow," NBER Working Papers 6858, National Bureau of Economic Research, Inc.
  7. 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.
  8. Andres Erosa & Tatyana Koreshkova & Diego Restuccia, 2009. "How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality," Working Papers 09007, Concordia University, Department of Economics, revised Mar 2009.
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