Social Norms, Product Demand, and Firm Size

The presented paper examines the impact of ethnic networks on product demand and firm growth in rural India. First, the authors establish changes in regional rainfall intensity as an asymmetric demand-shifter to members of different castes. Specifically, when consumers from historically disadvantaged communities (LC) experience a positive shift in income due to good rainfall, relative to others, they translate it into higher per-capita expenditure across various non-agricultural product categories, whose supply is not directly affected by rainfall. Second, the authors exploit this demand-shifter and document that the increase in LC households' demand leads to higher growth for the firms owned by members of the same caste category, relative to others. These empirical findings are used to discipline the model of firm dynamics with caste-specific demand shifters. The model can explain an important fraction of cross-caste firm size differences.