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