How efficiently is capital allocated? Evidence from the knitted garment industry in Tirupur

This paper studies the effect of community identity on investment behaviour in the knitted garment industry in the South Indian town of Tirupur. We document very large and systematic differences in both levels of capital stock and the capital intensity of production in firms owned by people from two different community groups. We argue that the differences in investment cannot be explained by productivity differences alone. We suggest that the most likely explanation is that the two communities differ in their access to capital.