The Missing “Missing Middle”
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Olken_The missing.pdf
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Author(s)
Hsieh, Chang-Tai
Olken, Benjamin A.
Date Issued
August 2014
Journal
Journal of Economic Perspectives
Publisher
American Economic Association
Citation
Hsieh, Chang-Tai, and Benjamin A. Olken. “ The Missing ‘Missing Middle’ .” Journal of Economic Perspectives 28, no. 3 (August 2014): 89–108. © 2014 American Economic Association
Version
Final published version
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.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/jep.28.3.89
