Regulation of Entry and the Distortion of Industrial Organization
AbstractWe study the distortions to industrial organization caused by entry regulation. We take advantage of heterogeneity across industries in their natural barriers and growth opportunities to examine whether some industries are differentially affected by country-level entry regulation. In industries with high natural entry barriers, entry regulation has little impact on the quantity and average size of firms in an industry. By contrast, in industries with low natural entry barriers, countries with high entry regulation have relatively few, large firms. We find no relation between natural entry barriers and overall industry share of manufacturing, as a function of entry regulation. Utilizing firm-level data, we show that operating margins are relatively high in low barrier industries in high entry regulation countries. Finally, we analyze the ability of industries to take advantage of shocks to growth opportunities. In countries with high entry regulation, industries respond to growth opportunities through the expansion of existing firms, while in countries with low entry regulation, the response is through the creation of new firms; the total sectoral response is invariant to the level of regulation. Our results suggest that regulation distorts the structure of industry, promoting industry concentration, but does not have measurable effects on intersectoral allocations.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10929.
Date of creation: Nov 2004
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Find related papers by JEL classification:
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- K2 - Law and Economics - - Regulation and Business Law
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-11-22 (All new papers)
- NEP-COM-2004-11-22 (Industrial Competition)
- NEP-LAW-2004-11-22 (Law & Economics)
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