In 2000, three of the largest states of India, with some of
the largest endowments of natural resources in the country, were split to
create three new states. We exploit the consequent dramatic change in the
distribution of resources to examine the interplay between political change
and the concentration of resources. We construct a theoretical framework to
understand the potential outcomes in this setting and examine how secessions
affect economic outcomes in the newly formed states. This framework is
designed to account for two effects: the first, which is independent of the
endowment of natural resources derives from the smaller size of each state
post break up which makes administration easier; while the second derives
from the increased concentration of natural resources in the breakaway
states relative to the rump. We employ a sharp regression discontinuity
design to estimate the causal effect of secession and concentrated resources
on growth and inequality outcomes at the sub-regional level. We find that
while the effect of secession is generally favourable, constituencies rich
in resources see a relative worsening of outcomes in both activity and
inequality. We attribute this local resource curse to political economy
effects.