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The Regulation of Entry and Aggregate Productivity

Authors


  • I thank two anonymous referees for important comments and suggestions that helped to improve the article significantly. I am also grateful to Omar Licandro, Florencio Lopez-de-Silanes, Albert Marcet, Morten Ravn, Roberto Samaniego, Philip Sauré, Jaume Ventura and seminar participants at the European University Institute, Pompeu Fabra University and the 2006 European Economic Association Annual Congress for valuable comments and suggestions.

Abstract

Euro area economies have lower total factor and labour productivity than the US. I argue that differences in entry cost contribute to this by affecting firms’ technology choice. Introducing technology choice into a standard heterogeneous-firm model, small differences in administrative entry cost can explain around one third of TFP differences. The productivity difference arises because entry costs reduce competition and the incentive to adopt more advanced technologies. Firm heterogeneity, technology choice and the competition channel all contribute to strengthening results compared to previous studies. The effects of entry costs are even larger when the labour market is not competitive.

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