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

Johannes Boehm and Ezra Oberfield ()

Working Papers from eSocialSciences

Abstract: The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, it shows that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, it documenst 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 appear to be more vertically integrated. To quantify the impact of these distortions on aggregate productivity, it constructs 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. The paper identifies 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.

Keywords: eSS; market; enforcement; organization of production; micro-data; production; sourcing decision; weaker enforcement; aggregate production; equilibrium; organization of production; producers; parameters; cost share; macro scale. (search for similar items in EconPapers)
Date: 2018-09
Note: Institutional Papers
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed

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