NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Electricity and Firm Productivity: A General-Equilibrium Approach

Stephie Fried, David Lagakos

NBER Working Paper No. 27081
Issued in May 2020
NBER Program(s):Development Economics, Environment and Energy Economics, Economic Fluctuations and Growth

The lack of reliable electricity in the developing world is widely viewed by policymakers as a major constraint on firm productivity. Yet most empirical studies find modest short-run effects of power outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general equilibrium effects of power outages on productivity. The model captures the key features of how firms acquire electricity in the developing world, in particular the rationing of grid electricity and the possibility of self-generated electricity at higher cost. Power outages lower productivity in the model by creating idle resources, by depressing the scale of incumbent firms and by reducing entry of new firms. Consistent with the empirical literature, the model predicts that the short-run partial-equilibrium effects of eliminating outages are small. However, the long-run general-equilibrium effects are many times larger, supporting the view that eliminating outages is an important development objective.

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Document Object Identifier (DOI): 10.3386/w27081

 
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