The Missing "Missing Middle"
Although a large literature seeks to explain the "missing middle" of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no "missing middle" in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
Prepared for the Journal of Economic Perspectives. We thank Arianna Ornaghi, Nick Tsivanidis, Pedro-José Martínez-Alanis and especially Donghee Jo for outstanding research assistance and Abhijit Banerjee, Esther Duflo, Santiago Levy, Pete Klenow, and John Van Reenan for helpful comments. The results from the Mexican Census have been screened by Mexico's INEGI to ensure no confidential data is released. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Chang-Tai Hsieh & Benjamin A. Olken, 2014. "The Missing "Missing Middle"," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 89-108, Summer. citation courtesy of