What Explains the Variety of Reform Outcomes Across Countries?

Suppose an identical regulatory reform is adopted simultaneously across a number of countries. We argue that the reformers will grow differently after the reform. To understand the reasons behind the eventual outcome divergence, we set up a tractable general equilibrium (GE) model to study how firms of different size grow after a regulatory reform. The reform reduces the costs to start, operate and close a business. The regulatory cost is modeled as lost labor hours. The model predicts that larger firms will grow faster than smaller firms after the reform. We then take the model predictions to the largest global publicly available firm-level data set, the Enterprise Surveys (ES), which encompasses 121,991 firm-level observations from 2006 to 2015 in 136 countries and territories and 211 country-years. We merge the ES data with the Doing Business indicators. We then test the theoretical predictions, which are broadly confirmed in the data. Thus, based on the notable differences of firm-size distributions across countries which are fairly stable over time, identical reforms may produce a variety of growth outcomes across countries.