Firm Sorting, Endogenous Competition and Productivity in Developing Countries

by Roman Zarate

The goal of this project is to study how competition and firm market power shape the productivity distribution and the way that firms locate into space. In particular, low productive firms sort into places in which they exert more market power, while high productive firms sort into locations in which it is easier for customers (workers) to substitute among suppliers (employers) facing more competition. This mechanism is relevant in the context of developing countries in which a large number of small, unproductive firms coexist with productive firms. My primary hypothesis is that since in developing countries it is hard to commute, firms exert more labor market power generating two effects. On the one hand, low productive firms survive, and on the other, productive firms don’t expand in some locations. To test this hypothesis, I would use the economic censuses in Mexico and assess the productivity and pro-competitive effects in the labor market of transport projects designed to move people within cities.