Efficiency of firms and markets in Ghana: The role of spatial factors
This study explores two interpretations of deviations in firms' input choices from profit-maximising models in Ghana, each with distinct policy implications. By analysing spatial factors, the study aims to determine whether removing barriers to adjustments or reducing market power through improved competition and infrastructure is more effective in optimising input allocation and boosting output in Ghana.
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Mensah-et-al-Policy-Brief-June-2023.pdf
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- Firms’ choices of inputs often deviate wildly from predictions based on a model of a profit-maximising firm operating in a perfectly competitive environment. Using information from the 2014 business census, we document that this is also the case in Ghana.
- One strand of the literature interprets these deviations as frictions, for example, firms' failure to optimise their input choices. It implies that the economy's total output could be increased by reallocating input factors between firms. We find that fully eliminating imperfections in the allocation of inputs can boost aggregate output in Ghana by 125%, similar to India (128% in 1994) but higher than in China (87% in 2005) or the United States (43% in 1997).
- A different strand of the literature interprets these same deviations as firms deliberately scaling back production to exercise market power and raise prices. In line with this interpretation, we find that the implied aggregate markups by district are positively related to average firm size and the extent of employment concentration in the largest firms. This pattern is particularly strong for service sectors.
- We verify whether implied frictions or implied markups correlate intuitively with spatial factors to determine the most plausible interpretation. Here, we find support for both interpretations. In line with expectations, local markets with low entry barriers and a large number of active firms tend to show larger frictions. On the other hand, an extensive and efficiently laid-out road network tends to lower the markups that firms can charge in the service sector.