No Country for Dying Firms: Evidence from India

Shoumitro Chatterjee, Kala Krishna, Kalyani Padmakumar and Yingyan Zhao

No 20188, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper identifies exit barriers as a new reason for India’s underdeveloped manufacturing sector. These barriers not only deter entry but also trap resources in unproductive firms. We document that Indian institutions generate such barriers and provide causal evidence of their effects. Using a dynamic model that separately identifies direct exit barriers from labor and capital adjustment costs, we find that exit barriers are quantitatively significant, particularly in low-performing states and labor-intensive industries. Our analysis yields three findings. First, reducing firing costs raises value added but reduces employment, whereas relaxing direct exit barriers increases both. Second, simultaneous reform of labor firing costs and direct exit barriers yields synergies. Third, sequencing matters: addressing direct exit barriers before labor firing costs preserves employment while improving efficiency. Finally, we show that exit subsidies are more effective at raising value added, while entry subsidies are more effective at increasing employment.

Keywords: India (search for similar items in EconPapers)
JEL-codes: D22 L11 L25 O11 O14 O47 (search for similar items in EconPapers)
Date: 2025-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP20188 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:20188

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP20188

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().