Evaluating the effects of entry regulations and firing costs on international income differences

Abstract

This paper analyzes the effects of entry regulations and firing costs on cross-country differences in income and productivity. We construct a general equilibrium industrydynamics model and quantitatively evaluate it using the cross-country data on entry costs and firing costs. Entry costs lower overall productivity in an economy by keeping lowproductivity establishments in operation and making the establishment size inefficiently large. Firing costs lower productivity by reducing the reallocation of labor from lowproductivity establishments to high-productivity establishments. The linear regression of the data on the model prediction accounts for 27% of the cross-sectional variation in total factor productivity. Moving the level of entry costs and firing costs from the U.S. level to that of the average of low income countries (countries with a Gross National Income below 2% of the U.S. level) reduces TFP by 27% in the model without capital, and by 34% in the model with capital and capital adjustment costs.

New Facts About Firm Risk Across Countries and Over the Business Cycle

“…As in Bergoeing, Loayza, and Piguillem (), Barseghyan and DiCecio (), D'Erasmo and Moscoso Boedo (), Moscoso Boedo and Mukoyama (), and D'Erasmo, Moscoso Boedo, and Senkal ().…”

“…These measures have been used in the literature extensively to measure how the costs translate into aggregate economic activity. Moscoso Boedo and Mukoyama () and D'Erasmo and Moscoso Boedo () are examples of work using costs into firm dynamics models and back up losses in terms of output and productivity.…”

“…It is clear that there is a strong positive relation between the two variables, with a correlation of .65. Table in the Appendix shows the numbers of the “Distance to Frontier” measures as well as the Costs to Start a Business and Time to Start a Business which is useful for comparison with previous work such as Moscoso Boedo and Mukoyama () and D'Erasmo and Moscoso Boedo ().…”

Entry Barriers, Competition, and Technology Adoption

“…My article is also related to the work of Barseghyan (), Barseghyan and DiCecio (), and Moscoso Boedo and Mukoyama (), who argue that higher entry barriers reduce TFP because they lead to the misallocation of resources. In contrast, I argue that higher entry barriers reduce TFP because they lead to the adoption of less productive technologies.…”

Announcement

“…In Mukoyama () he constructs and analyses a model of economic growth with innovation and imitation, in which entry of outside firms occurs via imitation of incumbent producers’ innovation. In Moscoso Boedo and Mukoyama (), Professor Mukoyama evaluates the effects of entry regulations and firing costs on cross‐country differences in income and productivity by quantitatively analysing a general equilibrium industry dynamics model. In Lee and Mukoyama (), Professor Mukoyama analyses the plant‐level heterogeneity in the US manufacturing sector and documents basic patterns of entry and exit of plants over business cycles.…”