Slack – the underutilization of factors of production – varies systematically with economic development. Using novel and detailed measures of the utilization of labor and capital from a large representative sample of firms in rural and urban Kenya, we show that utilization is increasing in firm size, market access, and economic activity. We present a model of firm capacity choice where indivisibility in at least one input is a key driver of slack. We embed the model in spatial general equilibrium, with features characteristic of low-income settings – including many small firms and high transport costs – and show that it rationalizes both the endogenous emergence of slack in steady-state and elastic aggregate supply curves. We empirically validate model predictions using reduced-form estimates of the general equilibrium effects of cash transfers from a large-scale RCT in Kenya. The parsimonious model replicates much of the experimental evidence, predicting a large real multiplier of 1.5, driven by expansion in low-utilization sectors and firms, and limited average price inflation. Counterfactual analyses indicate that multipliers are likely to be meaningfully smaller in lower slack settings, such as urban areas. We use the model to revisit the estimation of spatial spillovers in clustered RCTs and uncover non-trivial ’missing intercept’ effects on income and inflation. Additionally, we innovate methodologically by pre-registering key elements of model estimation and validation. The findings suggest that input indivisibilities and slack are key features of developing country settings, and are quantitatively important for macroeconomic dynamics and policies.
Authors
Michael W. Walker, Nachiket Shah, Edward Miguel, Dennis Egger, Felix Samy Soliman, Tilman Graff
- Acknowledgements & Disclosure
- We thank Vittorio Bassi, Natalie Bau, Adrien Bilal, Gabriel Chodorow-Reich, Kevin Donovan, Xavier Gabaix, Ed Glaeser, Doug Gollin, Johannes Haushofer, David Hémous, Joseph Kaboski, Daniel Kenniston, Gabriel Kreindler, David Lagakos, Hugo Monnery, Melanie Morten, Paul Niehaus, Tommaso Porzio, Mark Rosenzweig, Ludwig Straub, Tavneet Suri, ChristianWolf, as well as seminar participants at Oxford, Harvard, Yale Y-Rise, USC, Barcelona Summer Forum, NBER, NUS, and Zurich for excellent comments. This research was supported by grants from the National Science Foundation, CEPR/Private Enterprise Development in Low-Income Countries (PEDL), Open Philanthropy (recommended by GiveWell), STEG, and the Weiss Family Foundation. The author order was certified randomized. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33055
- Pages
- 72
- Published in
- United States of America
Table of Contents
- Introduction 3
- Motivating evidence 8
- Measuring capacity utilization 8
- Stylized facts on slack 11
- Model 13
- Demand 14
- Supply 14
- Equilibrium. 17
- Spatial shopping economy 20
- Alternative microfoundations for slack 21
- Estimation and calibration 22
- The eggergeneral2022 RCT 23
- Fitting the model to the baseline economy 25
- Economic geography 26
- Validation and counterfactuals 28
- Slack and Cash Transfers in General Equilibrium 28
- Consequences for impact evaluation and the ``missing intercept'' 31
- Distribution of Real Income Gains across Villages 34
- Counterfactual Cash Transfer Multipliers 35
- Quantitative extensions 37
- Conclusion 38
- Appendix Figures 44
- Appendix Tables 58
- Additional results 60
- Integer constrained equilibrium 60
- Continuous benchmark 61
- The effect of reallocation and effort costs on the real multiplier 62
- Estimating the stepsize s 63
- Deviations from the Pre-Analysis Plan 64
- Empirical Strategy for additional reduced form estimates 65
- Heterogeneous impacts on output by firm size and sector 65
- Impacts on inflation 66
- Impacts on labor supply and wages 66
- Data appendix 67
- Rural enterprise sampling details 67
- Urban enterprise sampling details 68
- Economic geography data details 69
- Market price data collection details 69
- Capacity utilization measures: Details 70
