American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Market Integration, Demand, and the Growth of Firms: Evidence from a Natural Experiment in India
American Economic Review
vol. 108,
no. 12, December 2018
(pp. 3583–3625)
Abstract
In many developing countries, the average firm is small, does not grow and has low productivity. Lack of market integration and limited information on non-local products often leave consumers unaware of the prices and quality of non-local firms. They therefore mostly buy locally, limiting firms' potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat-building industry. As consumers learn more about non-local builders, high quality builders gain market share and grow, while low quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality-adjusted consumer prices decline.Citation
Jensen, Robert, and Nolan H. Miller. 2018. "Market Integration, Demand, and the Growth of Firms: Evidence from a Natural Experiment in India." American Economic Review, 108 (12): 3583–3625. DOI: 10.1257/aer.20161965Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- L15 Information and Product Quality; Standardization and Compatibility
- L25 Firm Performance: Size, Diversification, and Scope
- L62 Automobiles; Other Transportation Equipment; Related Parts and Equipment
- O12 Microeconomic Analyses of Economic Development
- O14 Industrialization; Manufacturing and Service Industries; Choice of Technology