How Costly is Ethnic Discrimination? Evidence from the Late Imperial Russia

How ethnic discrimination affects the efficiency of resource allocation in the economy? In this paper, I exploit the discontinuity caused by the Pale of Settlement in the late Russian Empire to answer this question. The fact that the exact borders of the Pale inside which Jews were allowed to live had been set fairly arbitrarily allows to use the regression discontinuity design (RDD). The paper shows that firms inside the Pale of Settlement benefited from easier access to capital and had 48.1% higher power per worker. This effect doesn't depend on the nationality of the firm owner, which suggests that the effect is not driven by bonding social capital. The positive effect of the Pale on power and revenue per worker is relatively stronger for small towns and capital-intensive industries. As Jews mostly lived in small towns and were often engaged in credit activities, this heterogeneity of the effect suggests that Jewish presence was the key driver of the observed effect. We also show that closeness to the Pale was beneficial for firms in terms of power and revenue per worker. Though the results are not always robust to the inclusion of controls, we suggest the reasons why the robustness checks may be biased.