Product Markets’ Deregulation: A more Productive, more Effcient and more Resilient Economy?

Abstract

Relying on a rich frm-level dataset for one of the top product market reformers among OECD countries over the last decade, we fnd a positive association, already in the short-run, between frm-level productivity and deregulation of intermediate goods sectors. The long-run effects are mediated by frm-level productivity, with gains increasing with the distance to the (national) sectorial technological frontier. As laggard frms are more likely to be held-up by upstream producers with large market power, they have more to gain vis-à-vis more productive frms that are better equipped to deal with the ineffciencies of upstream markets. For the highly productive, the reduction of their competitive edge visà-vis low performers, coupled with decreased markups and increased uncertainty, reduce their incentives to innovate. Importantly, we fnd evidence of positive selection among laggard companies: for viable frms, the reforms unlock their growth potential and allow them to catch-up; for non-viable laggards, the likelihood of exit increases as they are not able to compete in the more demanding environment. In fact, while the increased competition downstream (resulting from increased competition upstream) is associated with higher exit probabilities for all frms, we fnd a stronger association for low productivity frms. Finally, by comparing the performance of frms more and less exposed to precrisis reforms, we show that the survival of the fttest and the unlocking of viable laggards growth boosts the resilience of the frms operating in the market.