Working Paper: CEPR ID: DP6671
Authors: Sergei Guriev; Evgeny Yakovlev; Ekaterina Zhuravskaya
Abstract: The optimal degree of decentralization depends on the importance of inter-state externalities of local policies. We show that inter-state externalities are determined by spatial distribution of interest groups within the country. Interest groups who have multi-state scope internalize inter-state externalities to a larger extent than the lobbyists with interests within a single state. We use variation in the geographic boundaries of politically-powerful industrial interests to estimate the effect of inter-state externalities on firm performance. Using firm-level panel data from a peripheralized federation, Russia in 1996-2003, we show that, controlling for firm fixed effects, the performance of firms substantially improves with an increase in the number of neighbouring regions under influence of multi-regional business groups compared to the number influenced by local business groups. Our findings have implications for the literatures on federalism and on international trade as trade restrictions are a common source of inter-state externalities.
Keywords: Federalism; Interjurisdictional Externalities; Interstate Trade Barriers; Interest Groups; Multinational Firms
JEL Codes: D78; F15; F23; H77; P26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Multistate interest groups (H73) | Firm performance (L25) |
| Multistate interest groups (H73) | Lower trade barriers (F19) |
| Multistate interest groups (H73) | Better outcomes for firms in neighboring regions (R30) |
| Number of neighboring regions influenced by multistate groups (F55) | Firm performance (L25) |
| Spillover effects from regions with multistate interest groups (H73) | Firm performance in related industries (L19) |
| Spillover effects from regions with local interest groups (H73) | Firm performance in related industries (L19) |