Judicial efficiency and the comparative disadvantage of Indian manufacturing

We examine whether poor efficiency of the judicial system can explain the sluggish growth of contract‐intensive manufacturing in India. We use a large set of fixed effects to address the potential endogeneity problem. More important, we contribute to the literature by exploiting the time dimension of the data, including the use of a conventional “within” estimator, and by employing three different measures of judicial efficiency. Our results, confirm the hypothesis that a more efficient judicial system facilitates development of industries with a higher degree of “relationship specificity.” This finding, combined with the lack of significant improvement in institutional quality in the country since the early 1990s, provides one explanation for comparative disadvantage of India’s contract‐intensive manufacturing sectors which also tend to be sectors producing complex manufacturing goods.