Essays on Public Policy and Firm Behavior

Abstract

Private sector plays a key role in job-creation and is central to economic development. Governments around the world use various tools and policies to foster growth of private enterprises. My dissertation aims to shed light on how firms respond to large-scale regulatory policy reforms and its aggregate implications for economic growth and productivity.

Chapter I investigates the impact of input-output linkages on aggregate productivity gains from reducing distortions that implicitly tax larger and more productive firms. Specifically, I study the elimination of firm-size restrictions on a set of product markets in India during the 2000s using a rich firm-level data. I show that such a reform propagates to upstream suppliers as a demand shock and to downstream customers as an input cost shock. Upon reform, there is an increase in aggregate productivity within the directly exposed and linked markets. These gains are primarily driven by reallocation of inputs to larger and more productive firms. However, productivity gains are attenuated when linked markets are highly concentrated. More productive firms in concentrated linked markets raise their markups in response to the demand or supply shock, thereby increasing misallocation. The adjustment of markups is consistent with models where demand elasticity decreases with firm productivity and underlines the substantial bias from ignoring market structure in linked markets when assessing the impact of piecemeal reforms. Conditional on the supply-chain being sufficiently competitive, linkages can amplify the overall gains from reforms that reduce distortions in a market.

Chapter 2 evaluates the impact of a capital subsidy on the ability of small firms to cope with electricity shortages. Infrastructure development has become a critical policy issue in many countries. With public resources strained, attention has increasingly turned to mobilizing private investment in infrastructure. Exploiting a policy within a state in India that offered subsides to acquire generators for firms below a capital threshold, I study the effectiveness of reducing self-generation costs. Using the triple differences approach, I find that a 25$%$ subsidy on the capital increased the probability of self-generation by 14$%$. Smaller firms with higher marginal cost of self-generation and lower credit costs are the key beneficiaries of this subsidy. Secondly, firms investing under the subsidy also have lower rates of self-generation, indicating capacity under-utilization. I estimate returns to infrastructural investment of at least 11$%$. Hence, despite low utilization and high marginal costs, a capital subsidy can incentivize firms on the margin to make large remedial infrastructure investments that yield net positive returns.

In Chapter 3, with Luiza Antoun de Almeida, we analyze the effects of selected structural reforms on output and employment in the short and medium term using comprehensive cross-country firm-level dataset covering both advanced and emerging market economies over the period 2003–14. In line with previous studies, we find that structural reforms have in general a positive impact on output and employment in the medium term. Furthermore, we find evidence that firm characteristics such as size, leverage, profitability, and sector influence the effectiveness of structural reforms. These findings have relevant policy implications as they help policymakers tailor the design of structural reforms to maximize their payoffs, taking into account their distributional impact on firms.