Firm-Level Input Distortion in Indian States

Ritam Chaurey, Ruchita Manghnani, Viviana Maria Eugenia Perego and Siddharth Sharma

No 10048, Policy Research Working Paper Series from The World Bank

Abstract: This paper measures trends in factor misallocation in India between 1999 and 2014, using data from a rich panel of Indian firms. The misallocation of a factor is modeled as an adjustment cost, that is, an implicit variable cost incurred by a firm when using that factor. Trends in the adjustment cost are estimated using a new adaptation of the firm-level cost-minimization approach. The paper documents these trends for four factors of production (permanent labor, contract labor, land, and fixed capital) across Indian states and by firm size. Overall, the findings show that adjustment costs declined over time for labor and land but with significant heterogeneity with respect to state growth rate and firm size. Using these stylized facts on trends in factor adjustment costs, as well as in-depth field interviews with firms in two Indian states, the paper also discusses potential policy developments behind these trends, including a preliminary examination of the role of state-level governance in the implementation of relevant factor market policies.

Date: 2022-05-17
New Economics Papers: this item is included in nep-bec
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