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Quantifying the impact of red tape on investment: A survey data approach

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  • Pellegrino, Bruno
  • Zheng, Geoffery

Abstract

An important strand of research in macro-finance investigates which factors impede enterprise investment, and what is their aggregate economic cost. In this paper, we make two contributions to this literature. The first contribution is methodological: we introduce a novel framework to calibrate macroeconomic models with firm-level distortions using enterprise survey micro-data. The core of our innovation is to explicitly model the firms' decisions to report in the survey the distortions they face. Our second contribution is to apply our method across seven countries to characterize the distribution of these distortions and estimate the gross domestic product (GDP) loss induced by distortionary red tape. Our estimates are based on a dynamic general equilibrium model with heterogeneous firms whose capital investment decisions are distorted by red tape. We find that the aggregate cost of red tape varies widely across the countries in our dataset, with an average cost of 0.8% of annual GDP. Our framework opens up a new range of applications for enterprise surveys in macro-financial modeling and policy analysis.

Suggested Citation

  • Pellegrino, Bruno & Zheng, Geoffery, 2024. "Quantifying the impact of red tape on investment: A survey data approach," Journal of Financial Economics, Elsevier, vol. 152(C).
  • Handle: RePEc:eee:jfinec:v:152:y:2024:i:c:s0304405x23002039
    DOI: 10.1016/j.jfineco.2023.103763
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    More about this item

    Keywords

    Bureaucracy; Growth; Investment; Misallocation; Regulations; Survey;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K2 - Law and Economics - - Regulation and Business Law
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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