Title: Essays on Firm Behavior In India
Description: The private sector in developing countries plays a key role in job-creation and is central to economic development and poverty alleviation. Governments around the world use various policies and regulations targeting firms in an attempt to foster growth. This dissertation focuses on the interplay between government policies, firm behavior, and labor markets in India. In Chapter 1, I study the impact of a location-based tax incentive scheme in India. Location-based policies that target particular geographic regions are widely used by governments, but there have been few rigorous evaluations of their causal impacts especially in the context of developing countries. Using aggregated and firm-level panel data, I find large increases in employment, total output, fixed capital, and the number of firms as a result of the program. These increases are due to both the growth of existing firms as well as the entry of new firms. There is supporting evidence that the new firms entering the treated regions are larger and more productive.

I find no evidence for relocation of firms or spillovers in industrial activity between treatment and control areas. Finally, using data from household surveys, I show that wages of workers rise but find no changes in housing rents or migration across the treated and control regions. My results therefore suggest that the policy increased welfare, and I also conclude that the policy was cost-effective. This provides support for place-based policies to correct for regional economic disparities, especially in settings with low labor mobility. In the next chapter, I focus on the effects of a place-based policy on informal firms. The informal sector in India is a major component of economic activity covering more than 80% of the workforce. More often than not, the informal sector is beyond the ambit of tax authorities, hurting public finances in India. In Chapter 2, I study the impact of the federally financed location-based tax incentive scheme (studied in Chapter 1) on informal firms in India.

Using a difference-in-differences approach with bordering districts, neighboring states, and major states as control groups, I find no evidence for increases in employment, total output, gross value added, and registration status for informal firms on average. However, separating informal firms into those that do not hire regular workers (Own Account Manufacturing Enterprises) and those that hire workers (Non-directory manufacturing enterprises/Directory Manufacturing Enterprises) reveals heterogeneous effects. I find that the policy change led to a higher likelihood of registration by NDME/DMEs but no effect on OAMEs. The policy change did not impact the size of these different kinds of firms. This chapter provides suggestive evidence that tax-exemption schemes can be a useful policy tool to incentivize informal firms to register. In Chapter 3, I revisit the contentious labor laws in India and their effects on hiring decisions of firms faced with demand shocks. Labor regulations in India differ by states and apply differently across types of laborers.

The most restrictive laws make it harder to fire permanent workers for firms. However, these laws do not apply to workers hired through contractors (contract workers). Using firm-level data from India, I find that compared to firms in flexible labor regulations, those in more restrictive labor regimes hire more contract workers as a response to transitory local demand shocks. I find no differential response in hiring of permanent workers by firms faced with these shocks. This suggests that firms circumvent labor laws by hiring workers indirectly through contractors in the face of economic fluctuations.