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Does Liberalization Promote Competition?

Author

Listed:
  • Laura Alfaro

    (Harvard University)

  • Anusha Chari

    (UNC-Chapel Hill)

Abstract

Using firm-level data from India, this paper investigates the distributional effects of deregulation on firm size and profitability. The data suggest that average firm size declines significantly in industries that deregulated entry. Firm entry leads occurs from the left hand tail of the size distribution with more small firms entering the market while the largest incumbent firms get significantly bigger following deregulation. Quantile regressions show that the shift in the distribution of firm size is non-linear with average firm size increasing till around the 15th percentile, and then getting significantly smaller till the 90th percentile while the largest percentile (95%) gets significantly bigger over the sample period. The marginal entry of small firms is consistent with an increase in competition following entry deregulation. Consistent with a decline in monopoly power, the Herfindahl index of firm sales also shows a significant decline. While summary statistics suggest a decline in average firm profits, quantile regressions show significant non-linearity and a heterogeneous impact of deregulation on profitability.

Suggested Citation

  • Laura Alfaro & Anusha Chari, 2010. "Does Liberalization Promote Competition?," Working Papers 1112, School of International and Public Affairs, Columbia University, revised Oct 2010.
  • Handle: RePEc:ecq:wpaper:1112
    as

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    File URL: http://indianeconomy.columbia.edu/sites/default/files/working_papers/wp_2011-5.pdf
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2005. "Regulation And Investment," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 791-825, June.
    2. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    3. Pinelopi Koujianou Goldberg & Amit Kumar Khandelwal & Nina Pavcnik & Petia Topalova, 2010. "Imported Intermediate Inputs and Domestic Product Growth: Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 125(4), pages 1727-1767.
    4. Pinelopi Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2009. "Trade Liberalization and New Imported Inputs," American Economic Review, American Economic Association, vol. 99(2), pages 494-500, May.
    5. Marcus Asplund & Volker Nocke, 2003. "Firm Turnover in Imperfectly Competitive Markets," PIER Working Paper Archive 03-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    6. Laura Alfaro & Anusha Chari, 2009. "India Transformed? Insights from the Firm Level 1988-2005," NBER Working Papers 15448, National Bureau of Economic Research, Inc.
    7. Chari, Anusha & Gupta, Nandini, 2008. "Incumbents and protectionism: The political economy of foreign entry liberalization," Journal of Financial Economics, Elsevier, vol. 88(3), pages 633-656, June.
    Full references (including those not matched with items on IDEAS)

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