Roza Khoban, "The Impact of Trade Liberalization in the Presence of Political Distortions"
Job talk. Roza Khoban is a PhD candidate in Economics at Stockholm University. She will present the paper "The Impact of Trade Liberalization in the Presence of Political Distortions".
Political distortions are prevalent in many developing countries and can imply substantial productivity losses. Theory is ambiguous as to whether openness to trade amplifies or reduces the effects of such distortions. This paper shows that trade liberalization in India decreased the value of firms’ political connections, suggesting a reduction in political distortions. First, using variation in firms’ connections stemming from political turnover, we identify that political connections increase firms’ performance by 10–20%. Second, we evaluate how the value of political connections changes after India’s externally imposed tariff reductions, using a triple-difference and difference-in- discontinuities design. We find that political connections become substantially less valuable when tariffs on input goods are reduced. Our findings imply that access to international markets reduces firms’ dependence on political connections to source input goods, thus reducing the distortionary effect of such connections. The effects are stronger in more corrupt states, where baseline political distortions are expected to be higher. Our results suggest a new margin for gains from trade in the presence of political distortions, through a direct effect of trade liberalization on the prevalence of such distortions.
Host: Halvor Mehlum