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Title: Small Scale Reservation Laws and the Misallocation of Talent

Author(s): Manuel Garc�a-Santana and Josep Pijoan-Mas

Publication Date: February 2011

Keyword(s): Firm size, Multisector growth models, Occupational choice and TFP differences

Programme Area(s): Development Economics and International Macroeconomics

Abstract: In this paper we quantify the effects of the Small Scale Reservation Laws in India on the aggregate productivity, aggregate output and welfare of the Indian economy. To this end, we extend the span-of-control model by Lucas (1978) into a multi-sector setting and embed it into the neo-classical growth model. Our main theoretical contribution is to model the occupational choice within this framework. We fully calibrate our model to data from India for the early 2000's. We find that lifting the Small Scale Reservation Laws would increase output per worker by 3.2 percent, capital per worker by 7.1 percent and aggregate TFP by 0.8 percent. Within manufacturing, output per worker would increase by 9.8 percent, capital per worker by 12.5 percent and TFP by 3.6 percent. Average firm size in manufacturing would raise from 19 to 69 employees. These are large numbers given that the size of the restricted sector is only 12 percent of manufacturing value added and 3 percent of total GDP. However, this conspicuous type of size-dependent policy cannot account for the large gap in manufacturing TFP existing between the US and India.

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Bibliographic Reference

Garc�a-Santana, M and Pijoan-Mas, J. 2011. 'Small Scale Reservation Laws and the Misallocation of Talent'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8242