We investigate the effect of operating in a democratic regime on firm productivity using a unique feature of Indonesia’s democratic transition. After the unexpected collapse of President Soeharto’s regime in 1998, the Soeharto-era district mayors were allowed to complete their five-year terms instead of being immediately replaced by democratically elected mayors. The resulting variation in political regimes across districts over time allows us to identify the impact of being in a democracy on firm outcomes. We use this variation in conjunction with firm-level and other administrative data to analyze the behavior of firms in all manufacturing industries in the country. By highlighting the effect of democracy on firm productivity, our analysis sheds light on the micro-foundations of the impact of democracy on growth.

Written with Prabhat Barnwal (Michigan State University), Ritam Chaurey (Johns Hopkins University) and Priya Mukherjee (College of William and Mary)