Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in Portugal

Authors


  • The authors thank the Portuguese Ministry of Justice, and particularly the Institute of Registration and Notarisation (Instituto dos Registos e do Notariado), for data on one-shop stops. We thank Maria do Céu, Gabriela Isidro and Ana Sommer for research assistance. We are also indebted to the Portuguese Ministry of Employment and Social Security and Gabinete de Estratégia e Planeamento (GEP) for giving us access to the matched employer–employee data. Financial support was provided by the Fundação para a Ciência e a Tecnologia (Portuguese Foundation for Science and Technology) through the Carnegie Mellon Portugal Program under Grant SFRH/BD/39666/2007, and project CMU-PT/OUT/0042/2009. We would like also to thank the suggestions and comments from the participants at NBER, World Bank and Tilburg University. All errors remain our own. Views expressed are those of the authors and do not necessarily reflect those of any branch or agency of the Government of Portugal.

Abstract

We evaluate the consequences of a recent regulatory reform in Portugal, which substantially reduced the cost of firm entry. Our analysis uses matched employer–employee data, which provide unusually rich information on the characteristics of founders and employees associated with new firms before and after the reform. We find that the short-term consequences of the reform were as one would predict with a standard economic model of entrepreneurship: the reform resulted in increased firm formation and employment, but mostly among ‘marginal firms’ that would have been most readily deterred by existing heavy entry regulations. These marginal firms were typically small, owned by relatively poorly educated entrepreneurs, and operating in low-technology sectors (agriculture, construction and retail trade). In comparison to firms that entered in the absence of the reform, these marginal firms were less likely to survive their first two years.

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