The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India

We study whether the effects on registered manufacturing output of dismantling the license raj - a system of central controls regulating entry and production activity in this sector - vary across Indian states with different labor market regulations and different nancial development. To guide the empirical analyisis, we first construct a model of industry equilibrium with financial market imperfections. Then, we test the predictions of our theory. The effects of the industrial policy reform are found to be unequal across Indian states. In particular, followingdelicensing, industries located in states with pro-employer labor market institutions as well as industries located in financially more developed states grew more quickly than those in pro-worker environments.