Demand for Quality, Variable Markups and Misallocation: Evidence from India [pdf] (March 2021)
Abstract: I study how demand-side factors affect markups and propose a new methodology to correct for bias in misallocation losses generated by variable markups. Using data on Indian firms, I first document two key correlations: marginal costs and markups are increasing in firm size. I then explore how these correlations are driven by two factors: the assortative matching of wealthier consumers to larger firms, and the lower demand elasticity of wealthier consumers. Results on how firms across the size distribution change their markups in response to exogenous demand shocks to poor households provide support to the demand-based markup channel: producing better quality and selling to wealthier, less demand elastic households leads larger firms to incur higher costs and charge higher markups. This demand-driven markup dispersion lowers aggregate productivity gains from reallocation because firms also adjust their markups in response to policies that may improve allocative efficiency. I show that firms’ pass-through of changes in their costs into prices is a sufficient statistic to account for these endogenous markup adjustments. Gains from reallocation are 50 percent lower due to demand-driven variable markups.
Coverage: [World Bank Development Blog] [Ideas for India] [Kellogg Insights] [ThePrint]
Abstract: We present large-scale evidence on the effects of access to information on agricultural technology adoption and crop yields in India. We combine geo-referenced data on the construction of new mobile phone towers with data on the location and content of 2.5 million phone calls made by farmers to a leading call center for agricultural advice. Exploiting language barriers between farmers and call center advisors, we show that while the expansion of the mobile phone network may lead to a long-term modernization of agriculture and increased productivity, this only happens in areas where farmers can access agricultural advice over the phone.
Coverage: [Kellogg Insights] [Ark Invest] [CNBC] [TPRI] [QRIUS]
Abstract: Theories of coordination failures in technology adoption have been influential in economics, but empirical evidence on their importance is limited. This paper studies the role of this friction in the adoption of digital payments systems, using data from the largest provider of electronic wallets in India during the 2016 Demonetization. Our empirical strategy exploits variation in the intensity with which Indian districts were exposed to the cash contraction induced by the Demonetization. Consistent with a dynamic technology adoption model with complementarities, we show that the rate of adoption of the technology increased persistently in response to the large but temporary cash contraction. Estimates of the model indicate that the 6-month adoption response would have been 60% lower absent adoption complementarities. This suggests that large but temporary policy interventions can resolve coordination failures in technology adoption, though we highlight an important limitation of this logic: temporary interventions can also exacerbate initial differences in adoption across regions or markets.
Credit Enforcement, Price of Quality and Inequality