How Efficiently is Capital Allocated? Evidence from the Knitted GarmentIndustry in Tirupur

This paper studies the effect of community identity on investment behaviour inthe knitted garment industry in the South Indian town of Tirupur. We documentvery large and systematic differences in both levels of capital stock and thecapital intensity of production in firms owned by people from two differentcommunity groups. We argue that the differences in investment cannot beexplained by productivity differences alone. We suggest that the most likelyexplanation is that the two communities differ in their access to capital. Copyright The Review of Economic Studies Limited, 2004.