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The regulation of entry and aggregate productivity

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  • Markus Poschke

Abstract

The 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 Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2006/21.

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Date of creation: 2006
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Handle: RePEc:eui:euiwps:eco2006/21

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Keywords: growth theory; aggregate productivity; technology adoption; firm dynamics; entry and exit; reallocation; selection; regulation of entry;

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Citations

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Cited by:
  1. Hernan J. Moscoso Boedo & Toshihiko Mukoyama, 2011. "Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences," Virginia Economics Online Papers 379, University of Virginia, Department of Economics.
  2. Felbermayr, Gabriel & Prat, Julien, 2011. "Product market regulation, Firm Selection, and Unemployment," Munich Reprints in Economics 20593, University of Munich, Department of Economics.
  3. Lorenzo Cappellari & Carlo Dell'Aringa & Marco Leonardi, 2011. "Temporary Employment, Job Flows and Productivity: A Tale of two Reforms," CESifo Working Paper Series 3520, CESifo Group Munich.
  4. Ferrari, Filippo, 2011. "Lo sviluppo delle competenze nei contesti precari
    [Skills development in precariousness: the dark side of flexibility?]
    ," MPRA Paper 33284, University Library of Munich, Germany.
  5. Alexandre Janiak, 2010. "Structural unemployment and the regulation of product market," Documentos de Trabajo 274, Centro de Economía Aplicada, Universidad de Chile.
  6. POSCHKE, Markus, 2011. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," Cahiers de recherche 08-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Janiak, Alexandre, 2013. "Structural unemployment and the costs of firm entry and exit," Labour Economics, Elsevier, vol. 23(C), pages 1-19.
  8. Raphael Bergoeing & Norman V. Loayza & Facundo Piguillem, 2011. "The Aggregate and Complementary Impact of Micro Distortions," 2011 Meeting Papers 1426, Society for Economic Dynamics.

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