Type | Working Paper |
Title | Capital immobility and regional inequality: evidence from India |
Author(s) | |
Publication (Day/Month/Year) | 2008 |
URL | http://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/ResearchPapers/Capital-Immobility-India.pdf |
Abstract | There are striking, persistent regional inequalities in developing countries like China and India. I use district-level data on Indian factories to investigate if these disparities are related to the spatial immobility of capital. Employing a differences in differences strategy, I compare across districts the investment response to a 1998 policy change which expanded the set of factories eligible for a directed bank credit scheme. If capital is immobile then the returns to it, and hence this response, would be lower in wealthier districts. I find that districts which gained more from modern high-yield seeds released at the start of the agricultural “Green Revolution” in the late 1960s responded less to the 1998 credit shock, indicating that these districts- wealthier and more industrialized today- have lower returns to capital. The size of this differential effect suggests that a district at the 25th percentile of the initial HYV adoption distribution has 34% higher returns to capital than one at the 75th percentile. Thus, improving capital mobility will reduce regional inequalities and inefficiencies by directing investment to poorer, high-return districts. |