The regulation of entry and aggregate productivity
AbstractThe aim of this paper is to contribute to explaining differences in aggregate productivity between similar, industrialized countries such as the US and European Union (EU) member states. By introducing shifts in administrative entry cost and a firm technology adoption decision in a model of heterogeneous firms close to Hopenhayn (1992), it matches the following facts: higher entry cost is associated with (1) both lower labor and total factor productivity, (2) more capital-intensive production, and (3) lower firm turnover. Compared to previous studies of reallocation intensity and aggregate productivity, endogenizing capital intensity through technology choice leads to stronger results; higher equilibrium capital intensity acts as an entry barrier to new firms, and protects low-productivity incumbents. Notably, the very small differences in the administrative cost of entry as documented by Djankov, La Porta, Lopez-de-Silanes and Shleifer (2002) suffice to explain 10 to 20% of differences in TFP and the capital-output ratio between Europe and the US. To obtain this, both heterogeneity of firms and allowing for technology choice are crucial.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2006/21.
Date of creation: 2006
Date of revision:
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More information through EDIRC
growth theory; aggregate productivity; technology adoption; firm dynamics; entry and exit; reallocation; selection; regulation of entry;
Other versions of this item:
- Markus Poschke, 2010. "The Regulation of Entry and Aggregate Productivity," Economic Journal, Royal Economic Society, vol. 120(549), pages 1175-1200, December.
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-11 (All new papers)
- NEP-COM-2006-09-11 (Industrial Competition)
- NEP-EFF-2006-09-11 (Efficiency & Productivity)
- NEP-ENT-2006-09-11 (Entrepreneurship)
- NEP-MAC-2006-09-11 (Macroeconomics)
- NEP-REG-2006-09-11 (Regulation)
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