Un-Incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka

Kumari Ranpati Dewage Thilini Sumudu (), Shawn Chen and Tang Sam Hak Kan ()
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Kumari Ranpati Dewage Thilini Sumudu: Business School, The University of Western Australia, Perth, Australia
Tang Sam Hak Kan: Business School, The University of Western Australia, Perth, Australia

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 2, 999-1035

Abstract: Un-incorporated firms are usually found less productive than their incorporated counterparts. However, little is known about the misallocation conditional on firms’ incorporation status and their productivity. This paper investigates the resource misallocation across un-incorporated firms and gauges the consequent aggregate productivity loss in comparison with their incorporated counterparts. We examine the question by using firm-level survey data from Sri Lanka’s manufacturing sector for 2005–2017 that provide unique information about firms’ corporation status. Our findings suggest that misallocation is more severe in unincorporated firms than in incorporated ones, leading to extra 42 % aggregate TFP loss to the former. By comparing the sources of misallocation between the two types of firms, we find capital is more misallocated relative to output and there is a stronger positive correlation between firm-specific distortion and productivity across the unincorporated firms. Our findings suggest that the un-incorporated firms suffer additional productivity loss at the aggregate level due to misallocation.

Keywords: firm-level distortion; misallocation; Sri Lanka; total factor productivity; unincorporated firm (search for similar items in EconPapers)
JEL-codes: H25 K22 O47 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejm-2022-0107

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