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Evaluating the effects of entry regulations and firing costs on international income differences

  • Hernan Moscoso Boedo

    ()

  • Toshihiko Mukoyama

    ()

This paper analyzes the effects of entry regulations and firing costs on cross-country differences in income and productivity. We construct a general equilibrium industry- dynamics model and quantitatively evaluate it using the cross-country data on entry costs and firing costs. Entry costs lower overall productivity in an economy by keeping low- productivity establishments in operation and making the establishment size inefficiently large. Firing costs lower productivity by reducing the reallocation of labor from low- productivity establishments to high-productivity establishments. The linear regression of the data on the model prediction accounts for 27% of the cross-sectional variation in total factor productivity. Moving the level of entry costs and firing costs from the U.S. level to that of the average of low income countries (countries with a Gross National Income below 2% of the U.S. level) reduces TFP by 27% in the model without capital, and by 34% in the model with capital and capital adjustment costs.

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Article provided by Springer in its journal Journal of Economic Growth.

Volume (Year): 17 (2012)
Issue (Month): 2 (June)
Pages: 143-170

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Handle: RePEc:kap:jecgro:v:17:y:2012:i:2:p:143-170
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