Red Tape Reduction, More New Firms? Saving Time and Money: Evidence from an Ecuadorian Reform

Reducing entry costs like bureaucratic procedures might be useful tool for stimulating new firm creation in a country. We exploit an unexpected reform that targets the physical (face-to-face) service channel, offering a decline in these types of costs in the firm creation process in Ecuador. To do this, we rely on a novel and underexplored administrative dataset and apply a difference-in-differences approach which compares physical (in-person) with electronic firm creation schemes before and after the implementation of the policy. We find that the reform increases the number of new firms by approximately 12.05% and the entry rate by approximately 108% in the short term. We also find that the impact varies across provinces and economic sectors. In addition, we find a decrease in the average number of days needed to create a new firm and an increase in the probability of creating a new firm with less initial minimum capital. The main conclusion is that the reform effectively contributes to increasing new firm creation in Ecuador. This matters from a policy perspective in a country with a high share of unregistered business.