Distribution Costs

Alessandra Peter and Cian Ruane

No 21515, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We provide the first direct estimates of distribution expenses incurred by manufacturing plants and quantify their importance for aggregate consumption and measured misallocation. Using a novel measure from the Indian Annual Survey of Industries, we document three facts: distribution expenses amount to over half of labor costs, are over three times larger as a share of sales for plants in the largest decile relative to the smallest, and declined by one third from 2000 to 2010. We develop a model of heterogeneous manufacturing firms that rely on distribution services to sell across space. The improvements in distribution over that time period raised manufacturing consumption by 24.5%. The gains materialize quickly, but unevenly: large firms expand while many small local firms shrink or exit. Distribution costs also matter for measured misallocation: standard TFPR measures generate spurious dispersion and a positive relationship with size. In the ASI, accounting for distribution costs lowers measured TFPR dispersion by 5.1% and the elasticity of TFPR with respect to plant size by 7.0%.

Keywords: Macro-development; Heterogeneous firms (search for similar items in EconPapers)
Date: 2026-05
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