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