The missing middle in developing countries revisited

Abstract

Purpose

The purpose of this paper is to develop a dynamic model to understand the evolution of the firm size distribution in developing countries.

Design/methodology/approach

Evidence points to the existence of a “missing middle” in the size distribution of firms in developing countries. In the model presented in this paper, the bimodality arises because of agents optimally selecting into a traditional and a modern sector. The key parameter in this model is the mean level of knowledge in the economy.

Findings

For a low mean, the two sectors co-exist. As the mean rises, the size distribution converges from a bimodal to an unimodal distribution.

Originality/value

Unlike existing explanations, this model does not rely on frictions to generate the bimodality in size distribution.

Citation

Dasgupta, K. (2016), "The missing middle in developing countries revisited", Indian Growth and Development Review, Vol. 9 No. 1, pp. 32-52. https://doi.org/10.1108/IGDR-11-2015-0048