Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

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Abstract

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity-intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.
Original languageEnglish
Pages (from-to)116–127
JournalJournal of Development Economics
Volume99
Issue number1
DOIs
Publication statusPublished - Sep 2012

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