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Deregulation, Misallocation, and Size: Evidence from India

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  • Laura Alfaro
  • Anusha Chari

Abstract

This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm-size dynamics and the reallocation of resources within industries over time. Following deregulation, we find that the extent of resource misallocation declines and a considerable thickening of the left-hand tail of the firm-size distribution suggesting a significant increase in the number of small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The size distribution we observe--namely, a large number of small firms and a small number of large firms--can be characterized as the "missing middle" in Indian manufacturing and suggests that small firms may continue to face constraints in their attempts to grow.

Suggested Citation

  • Laura Alfaro & Anusha Chari, 2012. "Deregulation, Misallocation, and Size: Evidence from India," NBER Working Papers 18650, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18650
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    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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