DP15134 Achieving Scale Collectively

Author(s): Vittorio Bassi, Raffaela Muoio, Tommaso Porzio, Ritwika Sen, Esau Tugume
Publication Date: August 2020
Keyword(s): Capital indivisibility, Firm clusters, firm size distribution, rental market, Technology adoption
Programme Areas: Industrial Organization, Development Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15134

Technology is often embodied in expensive and indivisible capital goods. As a result, the small scale of firms in developing countries could hinder investment and productivity. This paper argues that market interactions between small firms can alleviate this concern. We design and implement a survey of manufacturing firms in Uganda, which uncovers an active rental market for large machines among small firms. We then build an equilibrium model of firm behavior and estimate it with our data. The model shows that the rental market is quantitatively important for mechanization and productivity since it mitigates imperfections in other markets. The estimated transaction costs in the rental market are relatively small, which motivates us to redefine firm boundaries as a group of workers sharing the same machines. Doing so, the average firm size in our data increases by 77%. We conclude that through the rental market small firms achieve scale collectively.