1. Trade, Institutions and Religious Tolerance: Evidence from India
By Saumitra Jha

2. Introduction
The paper tries to explain how economic incentives can foster inter-ethnic cooperation
It uses 1000 years of history as a natural experiment
Background
7th to 17th century India
Rise of Islam
Complementarity of skills
Muslim advantage in Indian Ocean shipping
Created incentives for inter-ethnic exchange, most strongly in medieval trading ports
Incentives for building institutions fostering inter-ethnic cooperation

3. Questions
Did medieval trade foster later religious tolerance in India?
Is it due to the development of persistent institutions?

4. Outline Theoretical Framework Empirics Hypotheses
Some econometrics tools (OVB, Bad Proxy Control)
Saumitra’s results
Discussion of internal validity
Omitted Variables? Bad Proxies?

5. Theoretical Framework
Dynamic
Agents
Locals (Hindus) & Non-locals (Muslims)
Non-locals have better outside options
Strong (good at attacks) and Weak agents
Actions
Stay or leave
Produce for exchange
Attack any other agent (capture profits)
Markets, non-perfect

6. Key Factor #1: Complementarity
A low degree of complementarity between local and non-local production
then incentive for strong local to attack non-local: ethnic violence
Why?
Induces the non-local to leave, which reduces future competition and raises profits
Locals not likely to leave

7. Key Factor #2: Replicability
A high degree of production replicability
Lowers complementarity over time
Increases likelihood of attack
Necessary to have low replicability

8. Key Factor #3: Minority size
A smaller non-local minority
Less competition in trade therefore higher profits
More tempting to attack and capture
More muslims makes violence less likely
Redistributing institutions important
Low barriers for non-locals to enter markets

9. Medieval Indian Trading Ports
All three factors beneficial
High Complementarity
Trade through islamic pilgrimages, The Hajj
Islamic law conducive
Low Replicability
Trade networks hard to steal
Minority Size
High intra-muslim competition
Low barriers to muslim entry

10. Institutional Development
This should induce high demand for institutions
Two types evolved
Replicability-reducing institutions
Ethnic-specific apprenticeships
Social sanctions (Kaala-Paani)
Profit sharing institutions
Joint ventures
Political delegations
Commercial taxation

11. Empirical Strategy Selection-on-observables IV/2SLS
Assumption: conditional on initial controls (time t-1), trading ports are as good as randomly assigned
Reduced Form: What is the link between t & t-1?
t-1 = BC
t = , 2002
IV/2SLS
”Natural harbours” instrument for trading port.
What hypothesis are we testing?

13. Omitted Variable Bias
Suppose, for example, that the true relationship is
If the medieval (time t-1) %-of-muslims (ethnic) is unobserved
Then the omitted variable bias is:
Where the last coefficient comes from the regression:
So if more muslims causes less violence and trade is correlated with more muslims, we have a downward bias (overestimate trade’s effect on peace).

14. Bad Proxy Control
If we use the contemporary (time t) %-of-muslims as a proxy for the medieval ratio
And the proxy measures
Then the bias will be:
Hence, if more muslims causes more violence, and trade is positively correlated with ratio of muslims, we have a downward bias (overestimate trade’s effect on peace)

15. IV/2SLS
”Natural Harbours” (protected inlets) as an instrument for medieval trading port
Key assumption: Natural Harbours increases the likelihood of becoming a trading port, and is uncorrelated with all other factors that determine violence.
Do we believe in the instrument?
Problems
Consistent, but not unbiased
The ”weaker” is the instrument, the more it is biased towards the OLS estimate

16. Results 1 Main Results Table 3 Do we have any bad proxy controls?
Can we think of omitted variables?
Why is the 2SLS effect 80-90% larger than OLS?
Why do we need controls when using 2SLS?

17. Results 2 Alternative hypotheses (i.e. not institutions)
Table 5 Outcomes
Contemporary Income
Lower contemporary income (insign.)
Contemporary Trade
Lower value of trade (insign.)
%-Muslims
More muslims
What if %-Muslims is an omitted variable?
Bad Proxy Control
Table 7, See OLS, % Muslims
Lower OLS point estimate (Compare to Table 3)
Why?

18. Concluding Interpretations
These are reduced form results
How do we know that the mechanism is institutions? (We don’t)
Why not other persistent mechanisms
Changing values?
Or migration of tolerant individuals into trading ports?
Or that trade weakens religious identity?
Is it only ethnic violence, or crime in general?
If there is an effect on the latter, then it could be that trade induced the development of rule of law.
Then religious tolerance has nothing to do with it.