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Financial Fragmentation And Insider Arbitrage

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Executive Summary

If there were no impediments to the flow of capital across space, then the returns to capital should be equalized. The authors provide evidence to the contrary. There are large differences in the return to comparable investments across different towns in the state of Tamil Nadu in South India. They explore why these differences are not arbitraged away - and suggest that if an insider has monopoly power in arbitraging across towns then it is in his profit-maximizing interest to reduce but not eliminate the differences in returns to capital.

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