Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/105782 
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 2014-04
Publisher: 
University of Massachusetts, Department of Economics, Amherst, MA
Abstract: 
There are two divergent perspectives on the impact of subcontracting on firms in the informal sector. According to the benign view, formal sector firms prefer linkages with relatively modern firms in the informal sector, and subcontracting enables capital accumulation and technological improvement in the latter. According to the exploitation view, formal sector firms extract surplus from stagnant, asset-poor informal sector firms that use cheap family labour in home-based production. However, direct, firm-level evidence on the determinants and impact of subcontracting is thus far lacking in the literature. We apply a modified Heckman selection model to Indian National Sample Survey data on informal manufacturing enterprises (2005-06). We find that home-based, relatively asset-poor, and female-owned firms are more likely to be in a subcontracting relationship. Further, we perform selectivity-corrected Oaxaca-Blinder Decomposition and calculate treatment effects to show that subcontracting benefits smaller firms, firms in industrially backward states and rural firms; it is harmful for larger firms, firms in industrially advanced states, and urban firms. Our results suggest that the effects of subcontracting are more complex than those predicted by the divergent perspectives. Policy-makers need to engage with this complexity.
Subjects: 
sub-contracting
informal sector
Heckman sample selection
Blinder-Oaxaca de- composition
JEL: 
C31
O17
O53
Document Type: 
Working Paper

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