Deregulation, Misallocation, and Size: Evidence from India

Abstract

This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm-size dynamics and reallocation of resources within industries. Following deregulation, resource misallocation declines and the left-hand tail of the firm-size distribution thickens significantly, which suggests increased entry by small firms. However, the dominance and growth of large incumbent firms remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly nonlinear. The reallocation of market shares toward a small number of large firms and a large number of small firms is characterized as the shrinking middle in Indian manufacturing. Small and medium-sized firms may continue to face constraints in their attempts to grow.

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