Input tariffs, speed of contract enforcement, and the productivity of firms in India

This paper extends the literature on trade liberalization and firm productivity (TFP) 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 an objective measure of judicial efficiency at the state level. The results suggest that for a 10 percentage point decline in input tariffs, firms in the state at the 75th percentile of judicial efficiency gain an additional 3.6 percentage points in productivity when compared to firms in the state with the median level of judicial efficiency. The results also indicate that the complementarities are strongest for firms in industries that are contract intensive and imported-capital intensive. These results are robust to using a matching estimator to address the self-selection of firms into states with high judicial efficiency and an IV approach to instrument input tariffs. In addition, the results are also robust to the addition of state-year interaction fixed effects to control for time-varying, unobservable state characteristics. Thus, the results indicate that rapid contract enforcement is necessary to maximize the productivity benefits from input tariff liberalization. (C) 2012 Elsevier B.V. All rights reserved.