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The typical size distribution of manufacturing plants in developing countries has a thick left tail compared to developed countries. The same holds across Indian states, with richer states having a much smaller share of their manufacturing employment in small plants. In this paper, I explore the hypothesis that this income-size relation arises from the fact that low income countries and states have high demand for low quality products which can be produced efficiently in small plants. I provide evidence which is consistent with this hypothesis from both the consumer and producer side. In particular, I show empirically that richer households buy higher price goods while larger plants produce higher price products (and use higher price inputs). I develop a model which matches these cross-sectional facts. The model features non-homothetic preferences with respect to quality on the consumer side. On the producer side, high quality production has higher marginal costs and requires higher fixed costs. These two features imply that high quality producers are larger on average and charge higher prices. The model can explain about forty percent of the cross-state variation in the left tail of manufacturing plants in India.

Factories --- Consumers --- Manufactures --- Industrial efficiency --- Efficiency, Industrial --- Industrial management --- Manufactured goods --- Manufactured products --- Products --- Products, Manufactured --- Commercial products --- Manufacturing industries --- Customers (Consumers) --- Shoppers --- Persons --- Factory buildings --- Industrial plants --- Manufacturing plants --- Mills (Buildings) --- Plants (Industrial buildings) --- Factory system --- Industrial buildings --- Mills and mill-work --- Workshops --- Econometric models. --- India --- Bharat --- Bhārata --- Government of India --- Ḣindiston Respublikasi --- Inde --- Indië --- Indien --- Indii︠a︡ --- Indland --- Indo --- Republic of India --- Sāthāranarat ʻIndīa --- Yin-tu --- インド --- هند --- Индия --- Supply and demand --- Labor --- Macroeconomics --- Agribusiness --- Macroeconomic Analyses of Economic Development --- Formal and Informal Sectors --- Shadow Economy --- Institutional Arrangements --- Informal Economy --- Underground Econom --- Economywide Country Studies: Asia including Middle East --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Aggregate Factor Income Distribution --- Professional Labor Markets --- Occupational Licensing --- Wages, Compensation, and Labor Costs: General --- Agricultural Markets and Marketing --- Cooperatives --- Labour --- income economics --- Agriculture, agribusiness & food production industries --- Income --- Skilled labor --- Agroindustries --- National accounts --- Economic sectors --- Economic theory --- Labor market --- Agricultural industries