Research

WORKING PAPERS

Bottlenecks versus ripple effects: The role of linkages in India’s product market liberalization

Policies that define benefit eligibility by firm-size to promote small and medium enterprises are widespread in many countries. Reducing such size distortionary policies propagate to upstream suppliers as a demand shock and to downstream customers as an input cost shock. I study the response of firms in these linked markets, using the elimination of firm-size restrictions for a set of product markets in India during the 2000s. Upon reform, I find aggregate productivity gains in both the reformed and linked markets. These gains are primarily driven by reallocation of inputs to larger and more productive firms. However, productivity gains are dampened when linked markets are highly concentrated. More productive firms in concentrated linked markets raise their markups in response, thereby reducing allocative efficiency gains. The adjustment of markups is consistent with models where demand elasticity decreases with firm productivity. Hence, linkages amplify the gains from piecemeal reforms if the supply-chain is sufficiently competitive.

Pandemics and Inequality: Perceptions and Preferences for Redistribution with Era Dabla-Norris (IMF Working Paper, WP/21/53)

This paper uses an individual-level survey conducted by the Edelman Trust Barometer in mid-April for 11 advanced and emerging market economies to examine perceptions of government performance in managing the health and economic crisis, beliefs about the future, and attitudes about redistribution. We find that women, non-college educated, the unemployed, and those in non-teleworkable jobs systematically have less favorable perceptions of government responses. Personally experiencing illness or job loss caused by the pandemic can shape people’s beliefs about the future, heightening uncertainties about prolonged job losses, and the imminent threat from automation. Economic anxieties are amplified in countries that experienced an early surge in infections followed by successful containment, suggesting that negative beliefs can persist. Support for pro-equality redistributive policies varies, depending on personal experiences and views about the poor. However, we find strong willingness to provide social safety nets for vulnerable individuals and firms by those who have a more favorable perception of government responses, suggesting that effective government actions can promote support for redistributive policies.

Sparking private investment in infrastructure: Evidence from a generator subsidy program

Electricity is a perfect example that underscores the need for infrastructure investment in developing countries. With public resources strained, attention has increasingly turned to mobilizing private investment in infrastructure. Manufacturing firms often cope with unreliable electricity supply by adopting self-generation. However, in the presence of financial, operational and other constraints, small firms have low rates of generator adoption and consequently, suffer significant losses under frequent power outages. In this paper, I evaluate the impact of a fixed-cost subsidy on the ability of small firms to cope with electricity shortages. Using a triple differences approach, I find that a 25% subsidy on the capital increases the probability of self-generation by 14%. Smaller firms with higher marginal cost of self-generation and lower credit costs are the key beneficiaries of this subsidy. Firms investing under the subsidy also have lower rates of self-generation, indicating capacity under-utilization of private infrastructure. Using the subsidy as an instrument, I estimate returns to infrastructural investment of at least 11%. Hence, despite low utilization and high marginal costs, a capital subsidy can incentivize firms on the margin to make large remedial infrastructure investments that yield net positive returns.

On the impact of structural reforms on output and employment: Evidence from a Cross-County Firm-level analysis with Luiza Antoun Almeida (IMF Working Paper, WP/18/73)

This paper analyzes the effects of selected structural reforms on output and employment in the short and medium term. It uses a comprehensive cross-country firm-level dataset covering both advanced and emerging market economies over the period 2003-2014. In line with previous studies, it finds that structural reforms have in general a positive impact on output and employment in the medium term. Furthermore, the paper also assesses whether the impact of structural reforms varies with firm-specific characteristics, such as size, leverage, profitability, and sector. We find evidence that firm characteristics do influence the effectiveness of structural reforms. These findings have relevant policy implications as they help policymakers tailor the design of structural reforms to maximize their payoffs, taking into account their heterogeneous impact on firms.