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Firm-Level Input Distortion in Indian States

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  • Chaurey,Ritam
  • Manghnani,Ruchita
  • Perego,Viviana Maria Eugenia
  • Sharma,Siddharth

Abstract

This paper measures trends in factor misallocation in India between 1999 and 2014, using datafrom a rich panel of Indian firms. The misallocation of a factor is modeled as an adjustment cost, that is, animplicit variable cost incurred by a firm when using that factor. Trends in the adjustment cost are estimated using anew adaptation of the firm-level cost-minimization approach. The paper documents these trends for four factors ofproduction (permanent labor, contract labor, land, and fixed capital) across Indian states and by firm size. Overall, thefindings show that adjustment costs declined over time for labor and land but with significant heterogeneity withrespect to state growth rate and firm size. Using these stylized facts on trends in factor adjustment costs, as wellas in-depth field interviews with firms in two Indian states, the paper also discusses potential policydevelopments behind these trends, including a preliminary examination of the role of state-level governance in theimplementation of relevant factor market policies.

Suggested Citation

  • Chaurey,Ritam & Manghnani,Ruchita & Perego,Viviana Maria Eugenia & Sharma,Siddharth, 2022. "Firm-Level Input Distortion in Indian States," Policy Research Working Paper Series 10048, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10048
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    References listed on IDEAS

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