Misallocation in the Market for Inputs: Enforcement and the Organization of Production

Johannes Boehm and Ezra Oberfield

No 14482, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and have a greater vertical span of production. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. The equilibrium organization of production and the network structure of input-output linkages arise endogenously from the producers' simultaneous cost minimization decisions. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale.

JEL-codes: E32 F12 O11 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-cta, nep-eff and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

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Related works:
Journal Article: Misallocation in the Market for Inputs: Enforcement and the Organization of Production* (2020)
Working Paper: Misallocation in the Market for Inputs: Enforcement and the Organization of Production (2020)
Working Paper: Misallocation in the Market for Inputs: Enforcement and the Organization of Production (2020)
Working Paper: Misallocation in the Market for Inputs: Enforcement and the Organization of Production (2020)
Working Paper: Misallocation in the market for inputs: enforcement and the organization of production (2018)
Working Paper: Misallocation in the market for inputs: enforcement and the organization of production (2018)
Working Paper: Misallocation in the Market for Inputs: Enforcement and the Organization of Production (2018)
Working Paper: Misallocation in the Market for Inputs: Enforcement and the Organization of Production (2018)
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