The Size Distribution of Manufacturing Plants and Development

Author/Editor:

Siddharth Kothari

Publication Date:

December 22, 2014

Electronic Access:

Free Full Text (PDF file size is 1000 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The typical size distribution of manufacturing plants in developing countries has a thick left tail compared to developed countries. The same holds across Indian states, with richer states having a much smaller share of their manufacturing employment in small plants. In this paper, I explore the hypothesis that this income-size relation arises from the fact that low income countries and states have high demand for low quality products which can be produced efficiently in small plants. I provide evidence which is consistent with this hypothesis from both the consumer and producer side. In particular, I show empirically that richer households buy higher price goods while larger plants produce higher price products (and use higher price inputs). I develop a model which matches these cross-sectional facts. The model features non-homothetic preferences with respect to quality on the consumer side. On the producer side, high quality production has higher marginal costs and requires higher fixed costs. These two features imply that high quality producers are larger on average and charge higher prices. The model can explain about forty percent of the cross-state variation in the left tail of manufacturing plants in India.

Series:

Working Paper No. 14/236

Subject:

English

Publication Date:

December 22, 2014

ISBN/ISSN:

9781498334396/1018-5941

Stock No:

WPIEA2014236

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

60

Please address any questions about this title to publications@imf.org