Who Benefits From Economic Reform? Firms and Distributive Politics

While the distributional consequences of economic reform have captivated political scientists, few studies have investigated the ability of different firms to reap gains from policy change. Reforms indeed create winners and losers, but there is scant evidence on specifically which firms benefit and which firms lose out. We propose that the benefits from liberalizing reform accrue mostly to firms that are not vulnerable to extortion by the state and that have past experience with lobbying through a business association. This theory goes against the common intuition that liberalization reduces the importance of the state in the distribution of gains from economic activity. To test the theory, we examine how India's national electricity reform in 2003 changed the quality of power supply for 1,094 manufacturing firms between 2002 and 2005. We find that liberalization produced highly skewed benefits and identify the politically salient characteristics that drive firm-level distributional inequality.