Journal of Economic Perspectives: Vol. 28 No. 3 (Summer 2014)

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The Missing "Missing Middle"

Article Citation

Hsieh, Chang-Tai, and Benjamin A. Olken. 2014. "The Missing "Missing Middle"." Journal of Economic Perspectives, 28(3): 89-108.

DOI: 10.1257/jep.28.3.89

Abstract

Although a large literature seeks to explain the "missing middle" of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no "missing middle" in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models explaining "the missing middle" in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.

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Authors

Hsieh, Chang-Tai (U Chicago)
Olken, Benjamin A. (MIT)

JEL Classifications

D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
G30: Corporate Finance and Governance: General
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L51: Economics of Regulation
L60: Industry Studies: Manufacturing: General
O14: Industrialization; Manufacturing and Service Industries; Choice of Technology
O17: Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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