Power shortage and firm productivity: Evidence from the World Bank Enterprise Survey

Abstract

This paper extends a standard model of monopolistic competition with heterogeneous firms and incorporates energy as intermediate input. The effect of energy shortage on firm productivity is illustrated theoretically and examined empirically. Our reasoning contributes to the understanding of the mechanism by which energy shortage affects the productivity of enterprises. The empirical analysis is based on the World Bank's global enterprise survey dataset for 119 countries over the period 2007-2017. Our empirical results indicate that: (i) power shortage imposes a significant negative impact on firm total factor productivity (TFP); (ii) power shortage reduce firm TFP by jeopardizing skilled workers' productive activities; (iii) TFP of private enterprises is vulnerable to power shortage; (iv) and productivities for the firms located in low- and middle-income countries are sensitive to power shortage. The empirical results also shed light on TFP-enhancing energy policy formation. The government should provide a stable supply of energy and power shortage relief measures to ensure economic development. Since private firms in low and middle-income countries are most vulnerable to power shortages, the energy policy formulated by the governments of these countries should be tilted towards their private entities.