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© 2022 International Monetary Fund
Research Department
Distribution Costs*
Prepared by Alessandra Peter and Cian Ruane
Authorized for distribution by Chris Papageorgiou
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
We provide the first direct estimates of distribution expenses incurred by manufacturing plants and assess their importance for aggregate output. Using a novel measure from the Indian Annual Survey of Industries, we document three key facts: (1) distribution expenses are large – they amount to over half of labor costs; (2) plants in the largest decile – relative to the smallest – spend over three times as much on distribution as a share of sales; and (3) between 2000 and 2010, distribution costs as a share of sales declined by one third. We develop a model of heterogeneous manufacturing firms that rely on the distribution sector to sell their goods across space. We quantify the model using the facts on size and systematic heterogeneity in distribution shares as well as newly constructed estimates of intranational trade. Accounting for firm heterogeneity in distribution requirements is important: welfare losses from low TFP in the distribution sector are amplified 1.5-fold. From 2000 to 2010, India s aw an increase in intranational trade hand in hand with a decrease in the distribution share. In combination with the model, these trends suggest largescale decreases in both variable and fixed costs of distribution, leading to welfare gains of 58% over this ten year period.
| ISBN | 978–1-51358-###-# (Paper) 978–1-51358-###-# (ePub) 978–1-51358-###-# (PDF) |
| JEL Classification Numbers: | O11, O47 |
| Keywords: | Distribution, transportation costs, aggregate productivity |
| Author’s E-Mail Address: | CRuane@imf.org |
| ISBN | 978–1-51358-###-# (Paper) 978–1-51358-###-# (ePub) 978–1-51358-###-# (PDF) |
| JEL Classification Numbers: | O11, O47 |
| Keywords: | Distribution, transportation costs, aggregate productivity |
| Author’s E-Mail Address: | CRuane@imf.org |
Contents
1. Introduction
2. Distribution Costs in Indian Manufacturing
2.1. Data Description
2.2. Distribution Costs: Magnitude, Heterogeneity and Time Trends
2.3. Potential Explanations
3. Model
3.1. Setup
3.2. Equilibrium
3.3. The Role of Distribution Costs
4. Quantitative Analysis
4.1. Interstate Trade
4.2. Calibration
4.3. Welfare Impacts of Level and Heterogeneity in Distribution Costs
4.4. Changes in the distribution sector over time
5. Conclusion
References
A Data Appendix
A1. Annual Survey of Industries
A2. Interstate Trade
A3. Figures
B Model Appendix
We would like to thank Pete Klenow, Nick Bloom, Chad Jones, Melanie Morten and Monika Piazzesi for their continued support and guidance on this project. Thanks also for the insightful comments provided by all the participants of STEG, the Stanford Macroeconomics Lunch, the Stanford Trade Workshop, the Stanford Development Tea, and EAGLS. We gratefully acknowledge financial support from the Stan-ford Institute for Innovation in Developing Economies (SEED). Cian additionally acknowledges financial support from the Stanford Institute for Economic Policy Research.