Date

2018

Department or Program

Economics

Primary Wellesley Thesis Advisor

Ama Baafra Abeberese

Abstract

Highway and road networks are integral components of a developing economy’s transportation infrastructure, facilitating trade and growth. Improvements in transportation infrastructure decrease trade costs, thereby affecting the choices firms make. One of these choices is firm product scope, or the number of products a firm makes, which can have implications for firm productivity. To evaluate the impact of an improvement in transportation infrastructure on the product scope of firms, I exploit an exogenous change in trade costs induced by the construction of the Golden Quadrilateral Project (GQP), a major highway network in India. I utilize a difference-in-differences model to analyze the effect of proximity to the highway on product scope for firms in the manufacturing sector. My main empirical finding is that proximity to the highway results in a decrease in product scope and an increase in productivity. I find suggestive evidence that the reduction in product scope can be explained through the competition channel, whereby the increase in competition caused by reduced trade costs induces firms to drop products that are produced less efficiently to remain competitive. This paper contributes to the empirical literature on the effects of trade costs on firm product scope and productivity.

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