Essays on institutions and productivity

• Main Author: Boehm, Johannes
• Published: London School of Economics and Political Science (University of London) 2014
• Subjects: 338; HB Economic Theory
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.631548

The thesis contains three essays on the determinants of productivity. The first essay studies how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. In countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer - seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to causally identify the effect of contracting frictions on industry structure. I estimate a model and conduct a series of counterfactual experiments. Setting enforcement costs to US levels would increase real income by an average of 3.6 percent across all countries, and by an average of 10 percent across low-income countries. The second essay investigates the role of bureaucratic startup costs and credit market imperfections in shaping selection, misallocation, and aggregate productivity. We study a dynamic model of misallocation. Limited access to external financing and entry costs mean that firms are not necessarily operated by the most talented managers. We calibrate our model to the United States. Our findings suggest that the reduction of startup costs would only have a small impact on aggregate productivity and welfare. Financial frictions, on the other hand, seem to have a much larger impact. The third essay returns to the role of intermediate inputs for economic performance. Using panel data on manufacturing firms in India, we study the role of input complementarities in shaping the firm’s choice of products. We find that firms are more likely to add products to their portfolio if these products require intermediate inputs that the firm is already using in their production activities. Our findings shed light on the source of firm’s core competencies. We also provide the first study of supply linkages within multiproduct firms in developing countries. We find product turnover rates in India that are comparable to US levels.