“The Aggregate Importance of Intermediate Input Substitutability” with Alessandra Peter, January 2018.
Should economic development policies target specific sectors of the economy or follow a 'big push' approach of advancing all sectors together? The relative success of these strategies is determined by how easily firms can substitute between intermediate inputs sourced from different sectors of the economy: a low degree of substitutability increases the costs from 'bottleneck' sectors and the need for 'big push' policies. In this paper, we estimate long-run elasticities of substitution between intermediate inputs used by Indian manufacturing plants. We use detailed data on plant-level intermediate input expenditures, and exploit reductions in import tariffs as plausibly exogenous shocks to domestic intermediate input prices. We find a long-run plant-level elasticity of substitution of 4.3, much higher substitutability than existing short-run estimates or the Cobb-Douglas benchmark. To quantify the aggregate importance of intermediate input substitution, we embed our elasticities in a general equilibrium model with heterogeneous firms, calibrated to plant- and sector-level data for the Indian economy. We find that the aggregate gains from a 50% productivity increase in any one Indian manufacturing sector are on average 47% larger with our estimated elasticities. Our counterfactual exercises highlight the importance of intermediate input substitution in amplifying policy reforms targeting individual sectors.
Revenue per unit of inputs differs greatly across plants within countries such as the U.S. and India. Such gaps may reflect misallocation, which lowers aggregate productivity. But differences in measured average products need not reflect differences in true marginal products. We propose a way to estimate the gaps in true marginal products in the presence of measurement error in revenue and inputs. Applying our correction to manufacturing plants in the U.S. eliminates an otherwise mysterious sharp downward trend in allocative efficiency from 1978–2007. For Indian manufacturing plants from 1985–2011, meanwhile, we estimate that true marginal products were only one-half as dispersed as measured average products.
The sale of manufacturing goods involves costs of distribution such as shipping, insurance and commissions. Using micro-data from India's Annual Survey of Industries, we document that larger plants spend a larger share of their sales on distribution. We ask to what degree these distribution costs act as a constraint on larger firms and can explain the high employment share in small plants. To explore this mechanism, we develop a simple general equilibrium model in which heterogeneous firms face fixed and variable costs of distributing their products to customers. Firms selling higher quality products sell to more distant customers and incur higher distribution expenses. We carry out some preliminary quantitative exercises to explore how much reducing the rate at which distribution cost increase with distance in our model affects aggregate consumption and the firm size distribution.
“The Industrial Revolution and Irish Manufacturing Quality”, October 2017
In this paper I present empirical evidence from an industrial exhibition in Ireland as to the geographic distribution of the quality of Irish manufactured products in 1883. My main finding is that manufacturers from the north-east were on average producing higher quality products than those from other parts of the country. This finding is consistent with the fact that Irish industrialization between 1850 and 1900 was mostly confined to the north-east of Ireland. Further research into the evolution of Irish manufacturing activity may help discriminate between existing theories explaining the localized industrialization which characterized Ireland in the 19th century.