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Citation Information

Type Journal Article - Mimeograph, Yale
Title Factor Immobility and Regional Inequality: Evidence from a Credit Shock in India
Author(s)
Publication (Day/Month/Year) 2005
URL http://aida.econ.yale.edu/~ss564/Job_market_paper.pdf
Abstract
This paper provides evidence of signi¯cant regional variation in factory growth across Indian districts after a federally mandated and uniform increase in credit supply to a speci¯c set of factories. This nation-wide increase in credit supply occurred because a rede¯nition of small scale industry made a set of previously ineligible factories eligible for directed credit. In response to the credit shock, districts with lower initial wealth saw a more rapid growth in the number of the newly eligible factories relative to factories that were already eligible for the directed credit, and this di®erential response lasted for the duration of the credit shock. The estimates imply that the credit shock caused relative growth in the newly eligible factories to be 72 percentage points higher in a district at the 25th percentile of the wealth distribution, as compared to a district at the 75th percentile. Given that the average relative growth rate of these factories in India during the period studied was 7.3 percent, the results indicate a substantial di®erential across districts in the response to the credit shock. I interpret this di®erential response as informative of factor immobility across districts. Since districts with lower wealth have fewer factories, the results also show that factor immobility is one reason behind inter-district inequality in industrialization, and that improving the °ow of credit across districts will reduce this inequality.

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