Essays On Productivity and Resource Reallocation

My thesis consists of four chapters that examine how productivity is affected by government policies and market regulations. In particular, I study the impact of policy reforms on productivity through their effect on: (a) the allocation of resources across heterogeneous establishments, and (b) productivity at the establishment-level via technology adoption. In chapter one, I develop a theoretical model to analyze the effect of environmental policies on industry productivity and market competition. In my model, environmental regulations affect not only the allocation of resources across incumbent firms but also the incentive of firms to invest in pollution-abatement technologies. My findings imply that environmental regulations raise both environmental quality (by incentivizing the adoption of “cleaner” technologies), and industry productivity (by reallocating resources to more productive firms). In chapters two and three, using micro-level data from Indian manufacturing plants, I study total factor productivity (TFP) growth, and the contribution of firm-level subsidies to overall TFP growth. My analysis recognizes that while size-dependent subsidies may induce technology adoption for recipient firms, they also generate misallocation of resources across firms. I focus on the India subsidy program initiated in 2005 in Iron and Steel Industry. In chapter two, my growth accounting provides evidence of an acceleration of TFP growth after 2005 but primarily among plants that adopted more productive technologies. In chapter three, using a general equilibrium model with heterogeneous firms and a technology choice at the firm-level, I examine the impact of size-dependent subsidies on industry productivity. I show that while the induced misallocation tends to reduce productivity, technology adoption raises it. In the context of this model, the policy contributed about 20% to the observed productivity growth. In chapter four, I assess the effect of labor market reforms on measures of productivity across Indian states. Using a state-level labor reform index, and plant-level data, I show that large plants, in labor intensive industries, operating in the states with flexible labor market are more likely to gain from labor market reforms through an improvement in TFP and labor productivity.