Optimal Bias: The Financing of Minority Enterprise under Majority Rule

• In Event: Beyond Regulation: How States Influence Corporations (Virtual Session)

Abstract

Does the rise of majoritarian ethno-religious parties presage the economic marginalization of minority groups? We adjudicate the contrasting theoretical expectations that emerge from previous research by studying the fortunes of Muslim-owned enterprises under the Hindu nationalist Bharatiya Janata Party in India. Using a close-election regression discontinuity design and a unique census encompassing millions of firms, we find that Muslim entrepreneurs’ access to government financing is significantly higher in regions that elect a non-BJP state legislator. But contrary to the conventional wisdom, we show that this effect is driven by the BJP’s efforts to court Muslim businesspeople. In aggregate, these businesses gain substantially higher overall access to government financing, particularly in electoral districts that the party lost but might win in subsequent elections. Our research underscores the need to place design-based empirical findings in their broader political and strategic context, shows how politics influences the allocation of enterprise credit even after liberalization, and illuminates how competitive democracy and cross-cutting economic cleavages can foster improbable multi-ethnic alliances.

Authors

• Gautam Nair, Harvard University

• German Feierherd, Universidad de San Andrés