Intranational trade costs, product scope and productivity: Evidence from India's Golden Quadrilateral project

Abstract

We examine the potential for a reduction in intranational trade costs to increase firm pro-ductivity. Recent trade theories highlight a channel through which this increase may occur – a reduction in trade costs increases competition and leads firms to drop the products in which they are least efficient. We provide empirical evidence for this prediction in the context of an exogenous reduction in intranational trade costs induced by a highway construction project in India. We find that product scope falls and firm productivity rises in response to the construction of the highway. We also find that the products dropped are those that account for the lowest shares of the firm's output.