Misallocation and Capital Market Integration: Evidence from India
Research Question: How do increases in foreign capital affect the misallocation of capital across firms in India, what are the distributive effects on the population?
Data: Harmonization and cleaning of administrative data.
Method: We implemented differences in differences and triple differences estimators, where we compared industries that opened up to foreign capital vs. not and within each industry firms with high level of sales over capital pre-reform.
Challenges: The time period covered is long (1995-2015). During this period, India had a lot of changes in their industrial and geographical classification that required producing many crosswalks to harmonize the data.
Findings: The conclusion is that when an industry opens up to foreign equity, misallocation of capital goes down.