Market integration, demand, and the growth of firms: Evidence from a natural experiment in India

Robert Jensen, Nolan H. Miller

Research output: Contribution to journalReview articlepeer-review

Abstract

In many developing countries, the average firm is small, does not grow, and has low productivity. Lack of market integration and limited information on non- local products often leave consumers unaware of the prices and quality of non- local firms. They therefore mostly buy locally, limiting firms' potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat- building industry. As consumers learn more about non- local builders, high-quality builders gain market share and grow, while low-quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality- adjusted consumer prices decline.

Original languageEnglish (US)
Pages (from-to)3583-3625
Number of pages43
JournalAmerican Economic Review
Volume108
Issue number12
DOIs
StatePublished - Dec 2018

ASJC Scopus subject areas

  • Economics and Econometrics

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