2.2 Average Firm Size and Economic Development

positive relationship between firm size and economic development. In India, the average formal firm size amounts to 70 workers, about 60 percent of the size of the average firm in the US. Figure 2.2 shows a more general stylized fact in the development literature, namely, that of a positive relationship between average firm size and income per capita.

The methodology in Fattal Jaef (2022) leverages the cross-country differences in average firm size to back-out estimates of entry barriers from the model. The idea is that idiosyncratic distortions, which can be measured directly from the firm-level data through the inference strategy outlined earlier, and entry distortions, interact in shaping the average firm size in the economy. Equipped, then, with an estimate of the productivity elasticity of distortions, the methodology then solves for the entry barrier so that in the model’s stationary equilibrium, the average firm size in India (and in every country with firm-level data), the average firm size matches exactly the one observed in the data.

Figure 2.3 illustrates the estimate of the productivity-elasticity of idiosyncratic distortions and the model-based entry barrier against the income per capita for the 21 countries in our database, highlighting the relative position of India.

The figure shows a strong negative relationship between both types of distortions and the level of economic development. This finding is reassuring with respect to the methodology of identification of distortions, which is capable of finding little to no

FIGURE 2.2 Average Firm Size and Economic Development

Source: Fattal-Jaef 2022.