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Small Scale Reservation Laws and the Misallocation of Talent

  • Josep Pijoan-Mas

    (CEMFI and CEPR)

  • Manuel Garcia-Santana

    (CEMFI)

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 Society for Economic Dynamics in its series 2011 Meeting Papers with number 176.

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Date of creation: 2011
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Handle: RePEc:red:sed011:176
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  1. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  2. Andrés Erosa & Tatyana Koreshkova & Diego Restuccia, 2010. "How Important Is Human Capital? A Quantitative Theory Assessment of World Income Inequality," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1421-1449.
  3. Margarida Duarte & Diego Restuccia, 2009. "The Role of the Structural Transformation in Aggregate Productivity," Working Papers tecipa-348, University of Toronto, Department of Economics.
  4. Andrés Erosa, 2000. "Financial Intermediation and Occupational Choice in Development," UWO Department of Economics Working Papers 20003, University of Western Ontario, Department of Economics.
  5. Gary D. Hansen & Edward C. Prescott, 1999. "Malthus to Solow," Staff Report 257, Federal Reserve Bank of Minneapolis.
  6. repec:bla:restud:v:77:y:2010:i:4:p:1421-1449 is not listed on IDEAS
  7. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
  8. Jonathan Goyette & Giovanni Gallipoli, 2012. "Distortions, Efficiency and the Size Distribution of Firms," Cahiers de recherche 12-06, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
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