Working Papers

Small By Choice: Reassessing the Aggregate Implications of Size-Based Regulations  (New Draft coming soon)

Abstract: Firms with employment exceeding a threshold level are more regulated than smaller firms in many countries. Current work gauges such rules' impact based on whether firms bunch at the threshold, with more bunching taken to imply higher regulatory costs. In this paper, I show that size-based rules can be highly restrictive for firms even with no bunching. I argue using India's employment protection legislation (EPL) that applies to manufacturing plants with 100+ full-time workers. Although plants do not bunch at 100 workers, I show that EPL restricts the employment growth of plants by lowering their transitions from below to above the regulatory threshold. Plants near the threshold also substitute towards contract workers and capital, on which EPL does not apply. To quantify aggregate implications, I develop and estimate a structural dynamic heterogeneous firm model with multiple factors of production and labor search costs. Counterfactuals suggest that removing EPL would make more plants enter and hire full-time workers faster, raising full-time employment and output by 9% and 4% in the long run.

No Country for Dying Firms: Evidence from India  (joint with S. Chatterjee, K. Krishna, and Y. Zhao)

(New Draft coming soon)

Abstract: This paper examines the impact of exit barriers on firm growth and development in India. Despite being one of the largest and fastest-growing economies, India’s manufacturing sector, particularly low-skill manufacturing, remains underdeveloped. We argue that Indian institutions create frictions that hinder factor adjustment and firm exit, trapping resources in unproductive firms and contributing to this underperformance. Our findings show that firms in India face significant adjustment costs and exit frictions, especially in states with higher misallocation and labor-intensive sectors. We develop and estimate a dynamic heterogeneous firm model incorporating entry, exit, and input adjustment costs. Our estimates suggest that reducing exit frictions to achieve firm exit rates at 70% of those in the US could increase aggregate value added and productivity by about 13% and 3%, respectively. The impact on employment, however, depends on the availability of capital and can potentially be negative if capital is fixed.