Advanced seminar in Economics - Lucie Gadenne (Queen Mary, University of London)

Do communities shape firm-to-firm trade in emerging economies? We study the role of communities in facilitating  trade and firm outcomes using data on production networks and firm owners' community (castes) affiliations for the universe of registered firms in West Bengal, India. We find that firms are substantially more likely to trade, and  trade more, with firms from their own caste. Studying the underlying mechanisms, we find evidence consistent both with castes alleviating trade frictions and taste-based discrimination against outsiders. Guided by these stylized facts, we develop a model of firm-to-firm trade in which communities affect pair  productivity and matching costs and estimate the model using our reduced-form results. Extending the positive effects of castes on trade to all potential supplier-client pairs would increase the number of network links by 71% and increase average firm-to-firm sales by 21%.