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Aghion et al. (2003) Openness and Economic Performance Pro-employer states (6): Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, Rajasthan, Tamil Nadu Neutral (“Control States”) (6): Assam, Bihar, Haryana, Jammu & Kashmir, Punjab, Uttar Pradesh. Pro-worker states (4): Gujarat, Maharastra, Orissa, West Bengal. A Simple Model of Industry Equilibrium Firms are heterogeneous in productivity and geographical locations Productiveness is drawn from a uniform density function θ [ 0 , 1 ] State-specific labor markets – State A is pro-worker and B is pro-employer labor costs are higher, ceteris paribus , in A as compared to B Equilibrium price clears the product market at the national level ( A + B ) Two regulatory constraints (i) entry costs (ii) ceilings to production Proposition 1. Assume w A > w B and b < ¯ b (barriers to entry are binding for
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Unformatted text preview: some Frms in both states before the reform). Then, de-licensing induces produc-tion reallocation from state A to state B , namely, ∆ S B > ∆ S A . Moreover, if the demand is sufFciently inelastic, then ∆ S B > and ∆ S A < . Proposition 2. Assume w A > w B and ˜ A < 1 (production ceilings are binding for some Frms in both states before the reform). Then, the elimination of barriers to production induces production reallocation from state A to state B , namely, ∆ S B > ∆ S A . Moreover, if the demand is sufFciently inelastic, then ∆ S B > and ∆ S A < . Empirical Method y ist = α is + β t + γ d it + μ r st + ( r st )( d it )+ ε ist Development Economics, LSE Summer School 2007 158...
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