Input Tariffs, Speed of Contract Enforcement, and the Productivity of Firms in India

This paper extends the literature on trade liberalization and firm productivity by examining the complementarities between the speed of contract enforcement and the productivity gains from input tariff liberalization. It does so by using firm-level panel data from India along with objective measures of judicial efficiency at the state level. Consistent with the main proposition derived from a simple theoretical model, the empirical results strongly support the notion of complementarities between the speed of contract enforcement and input tariff liberalization. In particular, the paper finds that for a 10 percentage point decline in input tariffs, firms in the state with the most efficient judiciary gain an additional 3.3 percent in productivity when compared to firms in the state with the mean level of judicial efficiency. The results also suggest that the complementarities are strongest for firms in institutionally dependent industries as well as for firms that are smaller and domestically owned. These findings are robust to alternate measures of productivity, judicial efficiency, and to the inclusion of other state controls such as state GDP per capita, state GDP, distance of state capital to ports, measures of overall business environment, labor market flexibility, and access to capital. Thus, the results indicate that rapid contract enforcement is necessary to maximize the productivity benefits from input tariff liberalization. JEL Codes: D21, F10, F13, F14