The Size Distribution of Manufacturing Plants and Development
IMF Working Papers, December 22, 2014
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Bibliographic details
- Authors: Siddharth Kothari
- Published: December 22, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498334396.001
Summary / Main finding
- The typical size distribution of manufacturing plants in developing countries has a thick left tail compared to developed countries.
- The same pattern holds across Indian states: richer states have a much smaller share of their manufacturing employment in small plants.
- Hypothesis: the income–size relation arises because low income countries and states have high demand for low quality products which can be produced efficiently in small plants.
- The model developed can explain about forty percent of the cross-state variation in the left tail of manufacturing plants in India.
Empirical evidence (consumer and producer sides)
- Consumer-side evidence: richer households buy higher price goods.
- Producer-side evidence: larger plants produce higher price products and use higher price inputs.
- Cross-sectional facts: a positive association between household income and purchased goods prices; a positive association between plant size and product price/input price.
Theoretical model and mechanisms
- Preferences: the model features non-homothetic preferences with respect to quality on the consumer side.
- Production: high quality production has higher marginal costs and requires higher fixed costs on the producer side.
- Implication: high quality producers are larger on average and charge higher prices.
- Mechanism linking income and plant-size distribution: higher income increases demand for higher quality (higher price) goods; producing higher quality requires larger plants => richer economies/states exhibit thinner left tails in plant-size distributions.
Subject areas and keywords
- Subjects: Agroindustries, Economic sectors, Employment, Income, Labor, National accounts, Skilled labor, Wages
- Keywords: Agroindustries, elasticity in the model, Employment, goods price, Income, income level, India, informal sector, larger plant, manufacturing, material input, minimization problem, non-homothetic preferences, North America, plant regression, price goods, price index, price-income relation, production function, quality, quality goods, share of employment, size distribution, Skilled labor, utility function, Wages, WP
Source: "The Size Distribution of Manufacturing Plants and Development", Siddharth Kothari, IMF Working Paper No. 2014/236 (December 22, 2014).