Deregulation derailed: evidence from services markets liberalization in Croatia

The conventional wisdom is that when business regulation is excessive, deregulation unambiguously promotes broadly desirable outcomes. The liberalization of services markets in Croatia demonstrates that this is not necessarily the case, particularly when those who stand to lose from such reforms have undue influence in the reform process. To assess the effects of the Croatian reform, we determine the yearly volume of deregulation relevant to each affected sector and construct a sector-level panel dataset encompassing a wide range of outcomes. Exploiting within-sector, over-time variation in the volume of deregulation, we find that deregulation increased total sectoral labor productivity but had no effect on entry, total sectoral employment, or total sectoral profit margins. While both new entrants and incumbents shared the labor productivity gains, incumbents benefited more. Incumbents even experienced an increase in profit margins. Heterogeneity analysis reveals that the reform was more effective in sectors with initially weaker incumbent political and market power. Our findings underscore the relevance of public choice perspectives for understanding not only regulation but also deregulation.