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Firm Size Distortions and the Productivity Distribution: Evidence from France

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  • Luis Garicano
  • Claire Lelarge
  • John Van Reenen

Abstract

A major empirical challenge in economics is to identify how regulations (such as firing costs) affect economic efficiency. Almost all countries have regulations that increase costs when firms cross a discrete size threshold. We show how these size-contingent regulations can be used to identify the equilibrium and welfare effects of regulation through combining a new model with the firm-level distributions of size and productivity. Our framework adapts the Lucas (1978) model to a world with size-contingent regulations and applies this to France where there are sharp increases in firing costs (which we model as a labor tax) when firms employ 50 or more workers. Using administrative data on the population of firms 2002 through 2007, we show how this regulation has major effects on the distribution of firm size (a "broken power law") and productivity. We then econometrically recover the key parameters of the model in order to estimate the costs of regulation which appear to be nontrivial.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1128.

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Date of creation: Feb 2012
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Handle: RePEc:cep:cepdps:dp1128

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Keywords: Firm size; productivity; labor regulation; power law;

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Citations

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Cited by:
  1. François Gourio & Nicolas Roys, 2013. "Size-dependent regulations, firm size distribution, and reallocation," Working Paper Series, Federal Reserve Bank of Chicago WP-2013-11, Federal Reserve Bank of Chicago.
  2. Silvia Giacomelli & Carlo Menon, 2013. "Firm size and judicial efficiency: evidence from the neighbour's court," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 898, Bank of Italy, Economic Research and International Relations Area.
  3. Joshua Wilde & Ishani Tewari, 2014. "Multiproduct Firms, Product Scope and Productivity: Evidence from India’s Product Reservation Policy," Working Papers, University of South Florida, Department of Economics 0214, University of South Florida, Department of Economics.
  4. Chang-Tai Hsieh & Benjamin A. Olken, 2014. "The Missing "Missing Middle"," NBER Working Papers 19966, National Bureau of Economic Research, Inc.
  5. Serguey Braguinsky & Lee G. Branstetter & Andre Regateiro, 2011. "The Incredible Shrinking Portuguese Firm," NBER Working Papers 17265, National Bureau of Economic Research, Inc.
  6. Henk Kox & George van Leeuwen (Statistics Netherlands), 2012. "Dynamic market selection in EU business services," CPB Discussion Paper 210, CPB Netherlands Bureau for Economic Policy Analysis.
  7. Vicente Salas-Fumás & J. Sanchez-Asin & David Storey, 2014. "Occupational choice, number of entrepreneurs and output: theory and empirical evidence with Spanish data," SERIEs, Spanish Economic Association, vol. 5(1), pages 1-24, March.

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