How Do Electricity Shortages Aect Productivity? Evidence from India

Endemic blackouts are a particularly salient example of how poor infrastructure might reduce growth in developing economies. As a case study, we analyze how Indian textile plants respond to weekly “power holidays. ” We then study how electricity shortages aect all Indian manufacturers, using an instrument based on hydroelectricity production and a hybrid Leontief/Cobb-Douglas production function model. Shortages reduce average output by about five percent, but because most inputs can be stored during outages, productivity losses are much smaller. Plants without generators have much larger losses, and because of economies of scale in generator capacity, shortages more severely aect small plants