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Essays on firms in developing countries

Nyamdavaa, Tsogsag (2021) Essays on firms in developing countries. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004285


This thesis examines firms in developing countries. The first chapter provides evidence on the effects of consumer monitoring on tax evasion behaviour of firms along the supply chain. I study a Mongolian government program, which incentivises consumers to report their purchases. First, I estimate the effect of the program on corporate income tax (CIT) and value-added tax (VAT), by comparing retailers who are directly affected, and wholesalers, who are only indirectly affected. I find that retailers increase their reported sales, but partly offset this by artificially inflating their costs on CIT returns. As a result, retailers' CIT liabilities increase by 11%. In comparison, their VAT liabilities increase by 31% because VAT is less prone to such cost manipulation. Second, I find that the program also increases the VAT liabilities of upstream firms by about 15% when they are more likely to sell to (monitored) retailers, compared to the upstream firms that sell to firms that are not directly monitored. The program does not, however, affect the upstream firms' reported CIT liabilities. My findings highlight the enforcement advantage of VAT compared to CIT and that consumer monitoring enhances the self-enforcing mechanism in VAT along the supply chain. The second chapter characterises tax-evading firms using the same program in Mongolia. In particular, I study the firms that reported an abnormally large growth in their sales in the year that the program was launched, which suggests that those firms had previously been evading more taxes. I find that tax evasion was particularly prevalent among smaller firms, and conditional on firm size it was more common among older firms. My findings also suggest that tax evasion was more common in the capital city. The third chapter studies how resources should be allocated across firms. In particular, I theoretically investigate a trade-off between static and dynamic optimality conditions in terms of resource allocation across firms in the presence of learning-by-doing (LBD) effect. As in the standard misallocation literature, the static efficiency requires firms to have the same marginal revenue products (MRP) within each sector. In contrast, in the long run, I show that it is optimal to have some degree of dispersion in the MRP when there is an endogenous productivity growth through LBD mechanism. Then I compare 5 the implications from the dynamic and the static models quantitatively by using firm- level panel data from Indonesia. First, I show that firms' productivity process exhibits LBD mechanism. Namely, small and younger firms have lower productivity level but have higher productivity growth compared to larger and older firms. Second, I simulate both models and find that the dynamic model increases the aggregate TFP more in the long run than the static optimality conditions where I remove all dispersion in MRP.

Item Type: Thesis (PhD)
Additional Information: © 2021 Tsogsag Nyamdavaa
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Sets: Departments > Economics
Supervisor: Ngai, Rachel and Michaels, Guy and Naritomi, Joana

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