Enforcement and the Organization of Production

Uploaded: over 1 year ago; Last updated: over 1 year 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.

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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.