The Size Distribution of Manufacturing Plants and Development

The typical size distribution of manufacturing plants in developing countries has a thickleft tail compared to developed countries. The same holds across Indian states, with richerstates having a much smaller share of their manufacturing employment in small plants. Inthis paper, I explore the hypothesis that this income-size relation arises from the fact thatlow income countries and states have high demand for low quality products which can beproduced efficiently in small plants. I provide evidence which is consistent with thishypothesis from both the consumer and producer side. In particular, I show empiricallythat richer households buy higher price goods while larger plants produce higher priceproducts (and use higher price inputs). I develop a model which matches these cross-sectionalfacts. The model features non-homothetic preferences with respect to quality onthe consumer side. On the producer side, high quality production has higher marginalcosts and requires higher fixed costs. These two features imply that high quality producersare larger on average and charge higher prices. The model can explain about forty percentof the cross-state variation in the left tail of manufacturing plants in India.