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Determinants And Impact Of Subcontracting: Evidence From India's Informal Manufacturing Sector, Amit Basole, Deepankar Basu, Rajesh Bhattacharya

Economics Department Working Paper Series

There are two divergent perspectives on the impact of subcontracting on firms in the informal

sector. According to the benign view, formal sector firms prefer linkages with relatively modern firms in the informal sector, and subcontracting enables capital accumulation and technological

improvement in the latter. According to the exploitation view, formal sector firms extract surplus from stagnant, asset-poor informal sector firms that use cheap family labour in home-based production. However, direct, firm-level evidence on the determinants and impact of subcontracting is thus far lacking in the literature. We apply a modified Heckman selection model to Indian National Sample Survey data …