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

Johannes Boehm and Ezra Oberfield

No 24937, NBER Working Papers from National Bureau of Economic Research, Inc

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 appear to be more vertically integrated. 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: E23 F12 O11 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-cta, nep-eff, nep-mac and nep-tid
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Citations: View citations in EconPapers (34)

Published as Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production*," The Quarterly Journal of Economics, vol 135(4), pages 2007-2058.

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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 (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)
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