Departement d'Economie, Sciences Po
28 Rue des Saints-Peres
Institutional Affiliation: Sciences Po
Information about this author at RePEc
NBER Working Papers and Publications
|August 2018||Misallocation in the Market for Inputs: Enforcement and the Organization of Production|
with Ezra Oberfield: w24937
The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and appear to be more vertically integrated. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customi...