joint with Furkan Sarıkaya and Jesica Torres
This paper documents the life cycle of formal and informal plants using five waves of the Mexican establishment census. Formal plants begin operations with three times more workers than informal plants and exhibit faster growth rates. Throughout their life cycle, formal establishments more than double their size, while informal plants increase their size by only 77%. A general equilibrium model is developed to quantify the aggregate economic losses stemming from these growth rate disparities. In the model, plants grow through productivity investments, and informality emerges from incomplete enforcement. In equilibrium, informal plants exhibit flatter life cycle profiles to avoid detection and taxation. Model parameters are calibrated to match key properties of plant size distribution and the life cycle of plants in Mexico. Quantitative results indicate that a revenue-neutral full enforcement increases aggregate output and the overall growth rate by sixteen and twenty-five percent relative to the benchmark, respectively.
Abstract: This paper focuses on the role of development on informality through higher wages and expanded production possibilities. First, it documents that richer countries have smaller informal, unregistered, plants in terms of employment on average, using informal plant-level survey data across countries. This negative relationship holds even after controlling for plant-level characteristics. Then, a dynamic-general equilibrium model with incomplete enforcement is developed such that formal and informal plants coexist in equilibrium. The model incorporates subsistence informality where agent with lowest ability levels run informal plants instead of being employed as workers. It also allows for agents with abilities between workers and formal managers to operate informally. In the model, when plants become more productive, some agents operating informally choose to be workers thanks to higher wages, and some transition into formality due to better production possibilities, which decreases informal mean size. The model parameters are calibrated to match the key properties of formal and informal plant-size distributions in Ghana. In the benchmark equilibrium, the subsistence informality accounts for the majority of informal plants. Quantitative results indicate that around 30% increase in aggregate output due to higher productivity is associated with roughly a one-quarter decline in the mean of informal plants.
joint with Gustavo Ventura
Abstract: This paper documents that senior plant managers in less-developed countries spend more time dealing with government rules and regulations than their counterparts in richer countries. These facts are interpreted through the lens of a span-of-control growth model, in which top managers run heterogeneous production plants, employing middle managers as well as production workers. The model implies that increasing the time burden on top management leads to equilibrium changes in wages, occupational sorting, the size distribution of production plants and ultimately, to a reduction in aggregate output. These consequences hold even when the time burden is symmetric across all plants. Quantitative results show that increasing the burden on managers’ time from the levels observed in Denmark to the higher levels observed in poorer countries have substantial consequences. Imposing the average time spent on regulations in Argentina reduces aggregate output by about 1/3 and mean plant size by more than 5 employees. Results contribute to rationalizing differences in plant size and output across countries via a channel hitherto unexplored in the literature.
Abstract: Using aggregate and plant-level data, I document that in the manufacturing sector, (i) richer countries tend to have more managers per plant, (ii) bigger plants have more managers, (iii) managers in bigger plants earn more on average, and (iv) plants hire more managers as they grow. I develop a model where plants hire more middle managers with higher wages to increase their span-of-control. I find that when size-dependent distortions disciplined to match the number of managers per plant, they can account for 55.8% of the GDP per capita difference across countries.
joint with Juhee Bae
Journal of Development Economics, 2024, 171
Abstract: I document that small plants spend a higher fraction of their output on bribery than big plants, and that non-bribe-paying plants face higher distortions compared to bribe-paying plants in Türkiye. I develop a one-sector growth model in which size-dependent distortions, bribery opportunities, and different plant sizes coexist. In the model, plants are able to avoid distortions through bribery. The model parameters are calibrated with distortions and bribery opportunities in order to account for the plant size distribution as well as bribery expenditures by different plant sizes in the Turkish data. Counterfactual exercises show that size-dependent distortions become less distortionary in the presence of bribery opportunities. An increase in the size dependency of distortions has smaller aggregate effects since plants are able to circumvent distortions by paying larger bribes. Quantitatively, when bribery opportunities are present in the economy, mean plant size and output are 7.8 and 2.0 percent higher, respectively.
joint with Orhan Torul
The Journal of Economic Inequality, 2020, 18 (2), 239–259.
Abstract: We investigate the evolution of Turkey’s wage, income and consumption inequalities using a cross-country comparable methodology and the Turkish Statistical Institute’s Household Budget Survey and the Survey of Income and Living Conditions micro data sets. Turkey’s wage, income and consumption inequalities all exhibit downward time trends over the 2002-2016 period. This observation aligns well with the rapid minimum wage growth over the period. While wage inequality estimates display strong countercyclicality, income and consumption inequalities exhibit rather acyclical time-series movements. While recent education premium estimates of Turkey are similar to those in the early 2000s, estimates of recent gender and experience premiums, as well as residual wage inequality are lower. Income and consumption inequality estimates exhibit similar time trends with moderate level differences, and these trends are robust to the choice of inequality metrics.