Where are the Real Bottlenecks? A Lagrangian Approach to Identifying Constraints on Growth from Subjective Survey Data

We use firm-level survey data from over 20,000 firms in about 60 countries to identify constraints on the growth of firms. We develop a Lagrangian approach and measure the cost of different constraints by using managers' answers to survey questions on what aspects of their external environment inhibit the operation and growth of their firm. Our model reveals that, contrary to the common practice in much of the existing literature on this question, the importance of an obstacle to growth is not, except under very restrictive assumptions, measured by the coefficient on the reported level of the obstacle in a growth regression. This parameter estimate is typically contaminated by the endogeneity of public good supply at a country level (better performing countries have higher levels of supply), and by the endogeneity of demand for public goods at a firm level (better performing firms need higher levels of public good inputs). We illustrate these biases for a number of obstacles to growth, and argue that such biases can account for anomalous findings in the literature. A priori arguments suggest that the subjective evaluation of finance constraints is different from other constraints and this too is reflected in the data. We show how the importance of different constraints varies across countries and how the cost of a constraint depends on the characteristics of the firm.public goods, constraints on growth, infrastructure, finance, institutions, subjective data