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The Missing "Missing Middle"

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  • 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 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"," NBER Working Papers 19966, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19966
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    References listed on IDEAS

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    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.
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    12. 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.
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • 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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