TY  - JOUR
AU  - Hsieh, Chang-Tai
AU  - Olken, Benjamin A
TI  - The Missing "Missing Middle"
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19966
PY  - 2014
Y2  - March 2014
DO  - 10.3386/w19966
UR  - http://www.nber.org/papers/w19966
L1  - http://www.nber.org/papers/w19966.pdf
N1  - Author contact info:
Chang-Tai Hsieh
Booth School of Business
University of Chicago
5807 S Woodlawn Ave
Chicago, IL 60637
Tel: 773/8340590
Fax: 484-589-3583
E-Mail: chsieh@chicagoBooth.edu

Benjamin A. Olken
Department of Economics, E52-542
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/588-1437
Fax: 617/868-2742
E-Mail: bolken@mit.edu
AB  - 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 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.
ER  -