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Determinants of the allocation of resources and their efficiency implications in less developed countries

University of British Columbia

Less developed countries typically exhibit lower output per worker and too few medium firms compared to developed economies. The purpose of this thesis is to isolate the distortions driving this misallocation of resources and examine their efficiency implications. Using firm-level data, we show that the probability of being audited for taxes increases significantly around a size threshold of 30 employees in Uganda. This results in a break in the density of firm size around this size threshold and in significantly higher [lower] capital-labour ratios [growth rate] for firms below the size threshold. We argue that entrepreneurs on the verge of having a medium firm hide below the size threshold to avoid a rise in expected regulation costs. They can then substitute capital for labor to scale-up production and wait for a productivity shock that will offset the cost of growing. Other explanations such as a differential in technology or in factor prices due to inefficient credit markets do not reconcile the patterns observed in the data. Based on these empirical evidence we extend Hopenhayn [1992a]’s model with heterogeneous firms to include the tax and credit environment observed in Uganda. Under some simplifying assumptions we solve the model analytically and derive comparative statics for the parameters of interest. We finally revert to the full-blown version of the model and estimate it by Indirect Inference. The calibration strategy consists in choosing a set of structural parameters such that the model generates endogenous patterns in capital-labor ratios, growth of output and firm size density similar to the data. We show that the model does a reasonable job at explaining the data along several dimensions using a set of over-identifying restrictions. We conduct a positive analysis by comparing the effect of the uneven auditing scheme and credit constraints. Finally, we suggest policy interventions to improve efficiency in Uganda.

Text

2010-12-02

Attribution-NonCommercial-ShareAlike 3.0 Unported

http://hdl.handle.net/2429/30262

Economics

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-sa/3.0/