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Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences

  • Hernan J. 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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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap379.pdf
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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 379.

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Length: 40 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:vir:virpap:379
Contact details of provider: Web page: http://www.virginia.edu/economics/home.html

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