Firm Heterogeneity, Demand for Quality and Prices: Evidence from India (Job Market Paper) [pdf] (January 2020)
Abstract: Markups vary systematically across firms and are an important cause of productivity dispersion. However, whether markup dispersion represents misallocation depends on sources driving the dispersion. This paper provides evidence on the role of demand-side factors in shaping the dispersion of markups. Using data on Indian manufacturing firms, I first document two key correlations: prices 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. Guided by this observation, I examine how firms adjust prices to income shocks to poor households. Using weather-driven exogenous changes to local rural income, I find that average prices decrease when demand from poor households increases relative to wealthier households. These effects are driven by changes in markups for firms that sell to both rich and poor households. Higher rural income changes the demand composition and increases the demand elasticity for these firms, and they lower markups in response. The results are supportive of the demand-based markup channel: selling to wealthier and less demand elastic households leads larger firms to charge higher markups. The channel accounts for at least 8 percent of the observed productivity dispersion across the Indian manufacturing sector.
Coverage: [World Bank Development Blog]
Abstract: We study the effect of information on technology adoption and productivity in agriculture. Our empirical strategy exploits the expansion of the mobile phone network in previously uncovered areas of rural India coupled with the availability of call centers for agricultural advice. We measure information on agricultural practices by analyzing the content of 2.5 million phone calls made by farmers to one of India's leading call centers for agricultural advice. We find that areas receiving coverage from new towers and with no language barriers between farmers and advisers answering their calls experience higher adoption of high yielding varieties of seeds and other complementary inputs, as well as higher increase in agricultural productivity. Our estimates indicate that information frictions can explain around 25 percent of the agricultural productivity gap between the most productive and the least productive areas in our sample.
Coverage: [Kellogg Insights] [Ark Invest] [CNBC] [TPRI] [QRIUS]
Abstract: The network-based nature of many fintech products implies that their adoption is subject to coordination frictions. We provide evidence on the quantitative importance of these frictions by studying data from the largest provider of fintech payments in India following the 2016 demonetization. Consistent with a dynamic technology adoption model with externalities, we show that both the size and adoption rate of the platform increased persistently in response to the temporary cash contraction. Estimates of the model suggest that 60% of the six-month response was driven by externalities. With externalities, temporary interventions can thus lead to persistent shifts in adoption. However, we also highlight an important limitation of this logic: because externalities create state-dependence, temporary interventions can also exacerbate initial differences in adoption.
Credit Enforcement, Price of Quality and Inequality