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Birth versus worth: how does the Indian caste system affect entrepreneurship?

Misallocation of resources explains much of the productivity differences across countries, but the role of informal institutions in this misallocation has been little documented. In a recently published paper, Sampreet Goraya, Assistant Professor at the Department of Economics, brings evidence that the Indian caste system has a distortionary effect on capital and talent allocation in the economy.

Comparing low-caste, middle-caste, and high-caste entrepreneurs in Indian firm data, Sampreet Goraya highlights three stylized facts. First, the average revenue product of capital (arpk) is relatively higher for low-caste and middle-caste enterprises; in other words, capital owned by disadvantaged castes is more productive compared to high castes. Second, this cross-caste dispersion in arpk is driven by small entrepreneurs: arpk differences across castes decrease with enterprise size. Third, these differences also decline with better regional financial conditions, i.e., most of the cross-caste dispersion in arpk is concentrated in financially underdeveloped regions.

Caste-specific asymmetries in the financial markets in India are important, and the removal of such obstacles could increase output per capita by 5.6%.
Assistant Professor Sampreet Goraya

In building a quantitative model of entrepreneurship, Sampreet Goraya finds that there are substantial differences in access to credit across castes. These financial frictions not only affect the profitability of businesses across castes, but also distort occupational decisions: stricter borrowing constraints for lower castes discourage entry into entrepreneurship. Counterfactual exercises allowed by the model show that if low- and middle-caste entrepreneurs were granted a similar borrowing capacity to their high-caste counterparts, the Indian output per capita would increase by 5.6%.

Dept. of Economics Inequality Labor Entrepreneurship Equality Finance Economics Article Journal News Publication