Some of the most important policy issues facing low- and middle-income countries relate to how the structure and functioning of markets–including agricultural, educational, energy, financial, and manufacturing markets–shape firm growth and, more broadly, economic development. A large body of research has shown that market failures and poor public services hinder firm productivity. In addition, political interference, regulation, and corruption may further circumscribe firms in ways that are different across low and high-income contexts.
EGC’s Markets and Development initiative brings together methods and questions from the fields of industrial organization, trade, and development economics to produce a deep understanding of markets in lower-income countries that can be tied to micro-empirical evidence and local institutions. By spurring collaboration from across these areas, this initiative aims to research five main areas central to issues related to firms, markets, and the institutions that support them in developing countries:
- Firm size and productivity: Firms in low- and middle-income countries tend to be small and inefficient: many firms are born, never grow, and – in contrast to advanced economies – rarely exit. What are the distortions underlying these patterns? With regard to agricultural firms and farmers, EGC affiliates have studied the impact of government-subsidized inputs, such as water or fertilizer, on productivity.
- Market structure, competition, contracting, and trade: Work in development, often combining detailed data with industrial organization-based models, has provided a useful empirical grounding for what obstacles to trade and market integration are most important for low- and middle-income countries. EGC affiliates, for example, have employed experimental methods to evaluate competition models of rural agricultural markets. These issues also interact with EGC affiliates’ broader research agenda on international trade.
- Environmental regulation: Regulations might be effective in countering the market failures caused by environmental externalities. Yet in many low- and middle-income countries, policymakers are reluctant to enforce environmental regulations strictly. A major reason appears to be the high cost and uncertain efficacy of regulation conducted in a traditional, command-and-control manner. EGC affiliates have studied how firms respond to environmental regulation, as well as how emissions trading programs might reduce the cost of regulation for firms. Future work may consider the efficacy of non-traditional regulation, such as market-based regulations or distributed monitoring, in stepping in where command-and-control regulations have proven costly or ineffective.
- Energy markets: Energy markets are prone to monopoly and produce large external costs in air and climate pollution. These markets are, therefore, often subject to regulation or direct government intervention. In addition to the traditional concerns over regulation, energy subsidies are used as a means of redistribution to the poor in many low- and middle-income countries, where energy subsidies might play a key role in the budgets of households and small enterprises. EGC researchers are examining the role of government procurement in energy markets and have studied the role of impacts of expanding energy access in lower-income contexts.
- Markets for financial services: Economists’ tools within the field of industrial organization are ideal for exploring questions of market design in financial services. For instance, existing work has suggested the profound consequences of the first wave of the mobile phone and 3G revolutions for LMICs, including their gendered employment effects. Yet we know less about the implications for a second wave of deeper mobile-based markets for goods, services, and market integration, including financial inclusion. In another example from the banking system, policymakers often use regulation to influence bank branch entry, but evidence examining the impacts of this regulation on market-level outcomes is nascent.
