Entry Liberalization and Inequality in Industrial Performance

Fabrizio Zilibotti, Stephen Redding, Robin Burgess and Philippe Aghion

Scholarly Articles from Harvard University Department of Economics

Abstract: Industrial delicensing, which began in 1985 in India marked a discrete break from a past of centrally planned industrial development. Similar liberalization episodes are taking place across the globe. We develop a simple Schumpeterian growth model to understand how firms respond to the entry threat imposed by liberalization. The model emphasizes that firm responses, even within the same industrial sector, are likely to be heterogeneous leading to an increase in within industry inequality. Technologically advanced firms and those located in regions with pro-business institutions are more likely to respond to the threat of entry by investing in new technologies and production processes. Empirical analysis using a panel of three-digit state industry data from India for the period 1980–1997 confirms that delicensing led to an increase in within industry inequality in industrial performance.

Date: 2005
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Citations: View citations in EconPapers (118)

Published in Journal of the European Economic Association

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