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  5. The Impact of Trade Liberalization in the Presence of Political Distortions

American Economic Journal:
Applied Economics

ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)

The Impact of Trade Liberalization in the Presence of Political Distortions

  • Sebastian Jävervall
  • Roza Khoban
American Economic Journal: Applied Economics (Forthcoming)

Abstract

Political distortions are prevalent in many developing countries, implying substantial productivity losses. This paper investigates the impact of trade liberalization on political distortions in India. First, using variation in political turnover, we identify that politicians distort resources in favor of politically connected firms. Second, we show that reduced tariffs on input goods significantly decrease the distortionary effect of political connections, as trade reduces firms’ dependence on politicians for sourcing inputs. The results suggest a new margin for gains from trade through reduced politically-driven misallocation, implying that trade can address a widespread source of productivity losses.

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