DP5492 The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India

Author(s): Philippe Aghion , Robin Burgess , Stephen J. Redding , Fabrizio Zilibotti

Publication Date: February 2006

Keyword(s): delicensing , labour regulation , economic development

JEL(s): O14 , O18 , O21

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5492.asp

This paper investigates whether the effects, on registered manufacturing output, employment, entry and investment, of dismantling the 'license raj' - a system of central controls regulating entry and production activity in this sector - vary across Indian states with different labour market regulations. The effects are found to be unequal depending on the institutional environment in which industries are embedded. In particular, following delicensing, industries located in states with pro-employer labour market institutions grew more quickly than those in pro-worker environments. Our results emphasize how local institutions matter for whether industry in a region benefits or is harmed by the nationwide delicensing reform.