Monthly Archives: April 2008

Dismantling the License Raj

What was the effect of dismantling the license raj? A very pertinent question in which the proponents of liberalization as well as the critiques would be equally interested in!

Aghion, try to answer this question in a very interesting difference in difference estimation framework. The main argument of the paper is that the response to the ending of the license raj would be different in different states as they differ in terms of their institutional set up.

One of the institutional dimension on which states differ is the labor market regulation. There are some states which have more pro- labor regulations, some which have pro-employer regulations and a few which can be categorized as neutral. The main finding of the paper is that output rose more in pro-employer states than it did in pro-worker states in response to same delicensing reform. This result stands up to several robustness checks and the delicense-labor regulation interaction coefficient is similar in size and significance across a range of specifications.

This paper could not have come out at a more appropriate time when the debates about the effect of labor regulation on industrial performance abound and have important implications for understanding India’s trade competitiveness vis-a-vis China. Similarly it also sheds light on what may be one of the important factors driving the differences in regional growth rates.


Aghion P, Burgess R, Redding S, & Zilibotti F (forthcoming), “The Unequal Effects of Liberalization: Evidence from Dismantling License Raj in India”, American Economic Review.

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Affirmative Action in Education


Many countries mandate affirmative action in university admissions for traditionally disadvantaged groups. Little is known about either the efficacy or costs of these programs. This paper examines affirmative action in engineering colleges in India for “lower-caste” groups. We find that it successfully targets the financially disadvantaged: the marginal upper-caste applicant comes from a more advantaged background than the marginal lower-caste applicant who displaces him. Despite much lower entrance exam scores, the marginal lower-caste entrant does benefit: we find a strong, positive economic return to admission. These findings contradict common arguments against affirmative action: that it is only relevant for richer lower-caste members, or that those who are admitted are too unprepared to benefit from the education. However, these benefits come at a cost. Our point estimates suggest that the marginal upper-caste entrant enjoys nearly twice the earnings level gain as the marginal lower-caste entrant. This finding illustrates the program’s redistributive nature: it benefits the poor, but costs resources in absolute terms. One reason for this lower level gain is that a smaller fraction of lower-caste admits end up employed in engineering or advanced technical jobs. Finally, we find no evidence that the marginal upper-caste applicant who is rejected due to the policy ends up with more negative attitudes towards lower castes or towards affirmative action programs. On the other hand, there is some weak evidence that the marginal lower-caste admits become stronger supporters of affirmative action programs.


Bertrand M, Hanna R, & Mullainathan S (2008), Affirmative Action in Education: Evidence From Engineering College Admissions in India, NBER Working Paper 13926.

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Women as Policy Makers

I am sure many of us must have watched movies where the theme was women’s reservation. Though, most of them turn out to be a ‘cliche’, they at least bring out the complexities involved in implementing such policies. One can also occasionally find journalistic write ups on the issue. However, all said and done, most of these articles turn out to be anecdotal at best and unfortunately movies cannot constitute any substantive evidence either! This is where this article becomes important.

Do reservations for women at the Panchayat level work? This is the focus of the article. The authors use political reservations for women in India to study the impact of women’s leadership on policy decisions. They use data collected from 256 village councils from West Bengal and Rajasthan and compare the type of public goods provided in reserved and unreserved village councils.

The authors find that women elected as leaders under the reservation policy invest more in the public goods more closely related to women’s concerns: drinking water and roads in West Bengal and drinking water in Rajasthan. They invest less in public goods that are more closely linked to men’s concerns: education in West Bengal and roads in Rajasthan. These results seem to largely attributable to the gender of the Pradhan as they are unaffected by other characteristics of Pradhan.

According to the authors, these results contradict the simple intuition behind the Downsian model and the idea that political decisions are the outcomes of a Coasian bargaining process. In both of these views of the world, the fact that a woman is the head of the Gram Panchayat should not influence policy decisions. These results also suggest that direct manipulation of the identity of the policy maker can have important effects on policy.

It will be interesting to carry out similar type of analysis in other states and see what emerges. This is a very pertinent issue, not only from the point of view of gender empowerment but as noted by authors, also from the design of decentralized political institutions and their efficacy point of view.

Chattopadhyay R & Duflo E (2004), “Women as Policy Makers: Evidence from a Randomized Policy Experiment in India”, Econometrica, 72, 5, 1409-1443.

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Yet another Enron-type Debacle in making!

Governments seldom learn from their past mistakes and the state government of Maharashtra is in no way an exception. A decade back it signed a completely nonsensical deal with Enron for power production and now its somewhat going down the same road with the Dow Chemical Company. It apparently has offered almost 40 hectares of land to Dow for setting up a research lab around Pune.

There is nothing wrong in having this research lab per se. But it seems very little has been done in terms of impact analysis of the project. There is neither an environmental impact report, at least in the public domain, nor a concern for completely upsetting the local dairy business because of loss of the grazing land.

This recent article in The Business Standard sheds more light on the issue.


Filed under current economic issues