Caste as an Impediment to Trade

We compare outcomes across two types of villages in a poor region of rural India. The two types of villages systematically vary by which caste is dominant, i.e., the caste group which owns the majority of land. The dominant caste is either from an upper caste or a lower backward caste. The key finding is that income is substantially higher for low caste households residing in villages dominated by a low caste. Many of the usual factors which have previously been thought to adversely effect groups with high social distance: public good provision, political economy considerations, and exploitative tenancy or credit relations, do not seem to be important here. Instead, it is found that social distance reduces economic welfare due to a trade break-down across caste groups; thus precluding the efficient functioning of markets. Specifically, trade in irrigation water across castes seems to be difficult to maintain even though the potential gains from trade are huge. All else equal, lower caste water buyers have agricultural yields which are 45% higher if they reside in a village where water sellers are of the same caste compared to one where they are not. JEL Classification Codes: Q12, Q15, Z13