Abstract:
In this article, we explore whether localization of industries can reduce
economic distortions and dispersion in total factor productivity (TFP) among firms in
Punjab, Pakistan’s largest province economically. We consider two types of misallocation:
(i) dispersion in the distribution of output-based TFP (TFPQ), in particular the
survival of low productivity firms in the left tail; and (ii) dispersion in revenue-based
TFP (TFPR), indicative of allocative inefficiency. The results are mixed: On the one
hand, we find that the distribution of TFPQ is less dispersed in more agglomerated
areas, measured by the localization quotient, local productive concentration, and average
firm size. At the same time, we find that average TFPQ is also positively related
to localization, especially the presence of small firms in the same sector, even though
own-firm TFP is lowest for small firms. On the other hand, we do not find evidence
that agglomeration improves allocative efficiency measured as deviations in TFPR
from the sector average, concluding rather that greater localization of small firms is
associated with firms being more output and capital constrained.
