The Impact of Trade Liberalization in the Presence of Political Distortions^†

2025/06/26 by Sebastian Jävervall, Roza Khoban · 1 voice
Economics, Econometrics and Finance · Social Sciences · Business, Management and Accounting · #Global trade and economics #International Development and Aid #Political Influence and Corporate Strategies

paper · doi:10.1257/app.20230629

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. (JEL D22, D72, F13, F14, O14, O19, O24)

Citations

• Robust Nonparametric Confidence Intervals for Regression-Discontinuity Designs
• What Drives Media Slant? Evidence From U.S. Daily Newspapers
• Politically Connected Firms

Discussions

• Tariff barriers reduce productivity by channel beyond Econ 101: They raise the value to firms of building political connections (to get tariff exceptions) rather than producing more efficiently. Ne [bsky, 18 points, 0 comments]

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