Enforcement and the Organization of Production
Uploaded: over 3 years ago; Last updated: over 3 years ago ; Date of Publication: 02-June-2020
All India
2000 - 2013
English
Creative Commons Attribution 4.0 International (CC BY 4.0)
The strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement.
Research Report
We document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and have a greater vertical span of production. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale.
