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The Impact of Regulation on Innovation

Author

Listed:
  • Philippe Aghion

    (INSEAD - Institut Européen d'administration des Affaires, LSE - London School of Economics and Political Science, CdF (institution) - Collège de France)

  • Antonin Bergeaud

    (HEC Paris - Ecole des Hautes Etudes Commerciales, LSE - London School of Economics and Political Science, CEPR - Center for Economic Policy Research)

  • John van Reenen

    (LSE - London School of Economics and Political Science)

Abstract

We present a framework that can be used to assess the equilibrium impact of regulation on endogenous innovation with heterogeneous firms. We implement this model using French firm-level panel data, where there is a sharp increase in the burden of labor regulations on companies with 50 or more employees. Consistent with the model's qualitative predictions, we find a fall in the fraction of innovating firms just to the left of the regulatory threshold. Furthermore, we find a reduction in the innovation response of firms to demand shocks just below the threshold. Regulation reduces aggregate innovation by 5.7 percent.

Suggested Citation

  • Philippe Aghion & Antonin Bergeaud & John van Reenen, 2023. "The Impact of Regulation on Innovation," Post-Print halshs-04330712, HAL.
    • Handle: RePEc:hal:journl:halshs-04330712
    DOI: 10.1257/aer.20210107
    as

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    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • J8 - Labor and Demographic Economics - - Labor Standards
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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