Sub-contracting and efficiency of the informal sector in India

Firms operating on production linkages through vertical integration with other firms are generally expected to possess a secured market for their output and better accessibility to inputs. We test the hypothesis whether or not the informal firms operating on contracts with formal firms/agencies/contractors are more efficient in terms of technical efficiency vis-à-vis other firms. To test the hypothesis, the paper analyzes the efficiency performance of the informal enterprises in India across enterprises of two states (selected on the basis of level of development) using two stage Data Envelopment Analysis technique. The paper uses the large sample enterprise level data of National Sample Survey Organisation. It is observed that in the developed state (Delhi) firms on contracts are less efficient, while they are more efficient in the less developed state (Orissa). The results further reveal that enforcement of regulations makes the firms more inefficient.