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Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement


  • We wish to thank two anonymous referees for very helpful and detailed comments on an earlier draft of this paper. We would also like to thank participants at the Third IZA/World Bank Conference on Employment and Development, especially Jim Albrecht, Carmen Pagés, Jan Svejnar and seminar participants at Işık University for useful comments. This project would not have been possible without the financial support of a World Bank Research Support granted to Rita Almeida.

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This paper examines how stringent de facto firing regulations affect firm size throughout the developing world. A large firm level dataset is used across 63 countries and within country variation in the enforcement of the labor codes in countries with very different de jure firing regulations is explored. The findings strongly suggest that firms facing a stricter enforcement of firing regulations are on average smaller. This finding is interpreted as supportive of the fact that more stringent de facto firing regulations tend to reduce average employment. Robust evidence is found that this effect is stronger for more labor intensive manufacturing firms, especially those operating in low-technology sectors. Evidence also shows that this negative correlation does not hold in countries with a very weak rule of law.