Entry Regulation and Intersectoral Reallocation

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Entry Regulation and Intersectoral Reallocation

• Antonio Ciccone and Elias
  Papaioannou
• UPF
  Dartmouth College

NBER Summer Institute Macroeconomics and
Productivity July 2008
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Motivation Entry Restrictions and Productivity
Introduction Model Estimation Empirical
Results Conclusion

• How do entry restrictions affect intersectoral
  factor reallocation when open economies are hit
  by global industry shocks?
• - Multi-sector world equilibrium model where
  countries put upper bound on entry of new
  varieties.
• - Implies that in response to global sectoral
  shocks there is less factor reallocation in
  economies with tighter restrictions compared to
  frictionless benchmark.
• - Test this prediction in 1980s and 1990s using 2
  proxies for frictionless benchmark reallocation.

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Existing Theoretical Literature
Introduction Model Estimation Empirical
Results Conclusion

• Entry costs ? economic efficiency
• - Technology adoption (e.g. Parente and Prescott,
  1994)
• - Industry efficiency (e.g. Hopenhayn, 1992)
• - Product variety (e.g. Dixit and Stiglitz, 1978)
• - Market power (e.g. Stigler, 1971).
• - Entrepreneurship and employment (e.g.
  Pissarides et al., 2001)
• Focus here
• - Interaction between entry restrictions/delays
  and economic shocks
• - Examine link entry restrictions/delays ?
  intersectoral factor reallocation

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Empirical Literature on Entry Regulation
Introduction Model Estimation Empirical
Results Conclusion

• - Measurement of entry costs and delays
• De Soto (1989) Djankov, La Porta,
  Lopez-de-Silanes, and Shleifer (2002) World Bank
  (Doing Business Around the World) OECD
  (Regulation Database)
• - Entry regulation and entrepreneurship/growth
• Fisman and Sarria-Allende (2004) Klapper,
  Laeven and Rajan (2006) Nicoletti and Scarpetta
  (2001, 2002, 2006) Alesina, et al. (2005)
  Bertrand and Kramraz (2002) Bruhn (2007)
  Aghion, et al. (2008) Yakovlev and Zhuravskaya
  (2007) Ardagna and Lusardi (2008).

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Presentation Overview
Introduction Model Estimation Empirical
Results Conclusion

• Theoretical model
• Set-up
• Equilibrium analysis
• Global industry shocks and country-level entry
  restrictions
• Estimation Issues and Data
• Empirical Results
• Preliminary Results
• Empirical Analysis
• Conclusion

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Set-Up, Preferences, and Technology
Introduction Model Estimation Empirical
Results Conclusion

• - Continuum of countries and sectors (each
  mass1).
• - Each sector is made up of freely traded
  varieties, differentiated by country of origin.
• - Range of available varieties is endogenous.
• - Symmetric Cobb-Douglas preferences across
  industries (equal expenditure shares across
  industries).
• - Symmetric Constant-Elasticity-of Substitution
  within industries (substitution elasticity e gt
  1).
• - Labor only production factor
• - To produce q of a variety, firms need zq/A
  production workers and 1 overhead worker.
• - There is heterogeneity in productivity A across
  countries, sectors, and varieties.

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Technology Shocks and Varieties
Introduction Model Estimation Empirical
Results Conclusion
A(V,n,i)
0
V(n,i)
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Market Structure and Equilibrium
Introduction Model Estimation Empirical
Results Conclusion

• - Each firm produces a distinct variety and sets
  price to maximize profits.
• - Goods markets clear internationally.
• - Wages adjust to clear national labor markets.
  Labor supply is inelastic and constant in time.

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Profit Maximization Employment and Varieties
Introduction Model Estimation Empirical
Results Conclusion
z(v,n,i)
0
V
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Zero-Profit Variety Range
Introduction Model Estimation Empirical
Results Conclusion
z(v,n,i)
z0ni
V
0
V(n,i)
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Adjustment to Global Sectoral Shocks
Introduction Model Estimation Empirical
Results Conclusion

• Shocks to technology (Ani)
• 3 components
• country level (?n)
• industry level (si)
• country industry level (uni)

Key role for industry adjustment
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Frictionless Intersectoral Adjustment
Introduction Model Estimation Empirical
Results Conclusion
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Adjustment with Country-Industry Specific Entry
Restrictions
Introduction Model Estimation Empirical
Results Conclusion
0
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Industry Employment Growth
Introduction Model Estimation Empirical
Results Conclusion
Extensive Margin Only
Intensive Extensive Margin
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Introduction Model Estimation Empirical
Results Conclusion
Industry Shocks and Employment Growth
Employment Growth
Economy with less restricted entry Economy with
more restricted entry
0
Industry Shock
C zone
B zone
A zone
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Adjustment with Country-Specific Entry
Restrictions
Introduction Model Estimation Empirical
Results Conclusion
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Industry Employment Growth and Global Shocks
Introduction Model Estimation Empirical
Results Conclusion
Quadratic approximation in s and l
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Model Estimating Equation 1
Introduction Model Estimation Empirical
Results Conclusion
Model Estimating Equation 2
Industry frictionless global employment growth
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Proxies for Frictionless Employment Reallocation
in Response to Global Shocks
Introduction Model Estimation Empirical
Results Conclusion

• Benchmark-country approach use data from a
  country with low levels of entry regulation,
  where employment growth is unlikely to reflect
  frictions in product (or labor or capital)
  markets (Rajan and Zingales, 1998).
• ? Idiosyncrasies of benchmark country introduces
  measurement error.
• ? ME does not necessarily take the classical
  form.
• Global estimation approach estimate global
  employment reallocation in a frictionless economy
  using data on all countries and accounting for
  the fact that in countries with high barriers to
  entry (or other institutional frictions)
  employment reallocation might not reflect
  industry shocks (Ciccone and Papaioannou, 2006).
• ? Does not reflect idiosyncrasies of any
  country.
• ? Must be treated as a generated regressor.
• (Consistency of estimates under quite weak
  conditions. Valid standard errors somewhat more
  complicated. See Wooldridge 2002.)

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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2 Proxy Measures of Frictionless Employment Growth
Introduction Model Estimation Empirical
Results Conclusion

• US Employment Growth (US-EMPGRi)
• Global Frictionless Employment Growth (G-EMPGRi )

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Data
Introduction Model Estimation Empirical
Results Conclusion

• Country-Industry Level (from UNIDO)
• - Log change in employment (in the eighties and
  nineties).
• - 55-45 countries 27-28 manufacturing industries
  (more than 1,000 obs.)
• Country-Level
• - Entry restriction indicators from Djankov, La
  Porta, Lopez-de-Silanes and Shleifer (2002)
  focus on time to start business (model emphasis
  on delays)
• - Other controls (labor market regulation,
  financial development, income)
• Industry-level
• - US Employment growth
• - Global employment reallocation in a
  frictionless economy
• - Other industry measures (external finance
  dependence, sales growth, etc).

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Preliminary evidenceModel prediction of
negative relationship between frictionless
employment growth and the marginal industry
effect of entry delays
Introduction Model Estimation Empirical
Results Conclusion
bi
Frictionless employment growth
0
US-EMPGRi or G-EMPGRi
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Intersectoral Reallocation
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Marginal Effect of Entry Delays and Frictionless
Employment Growth in the 1980s
Introduction Model Estimation Empirical
Results Conclusion
Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Introduction Model Estimation Empirical
Results Conclusion
Marginal Effect of Entry Delays and Frictionless
Employment Growth in the 1990s
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Estimation
Introduction Model Estimation Empirical
Results Conclusion

1. LS using US industry employment growth to proxy
   frictionless reallocation
2. LS using estimated global (non-US) frictionless
   industry employment growth.
3. IV using estimated global (non-US) frictionless
   industry employment growth as an instrument for
   actual US employment growth.

1st Stage Figures
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Intersectoral Reallocation
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IV Estimates Combining the two proxy measures
of frictionless employment reallocation
1st Stage Figures
Introduction Model Estimation Empirical
Results Conclusion
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Intersectoral Reallocation
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Sensitivity Analysis-Robustness Checks
Introduction Model Estimation Empirical
Results Conclusion

• Differential effect of financial development for
  external finance dependent sectors (Rajan and
  Zingales, 1998) and sectors with good
  opportunities (Fisman and Love, 2007).
• Positive effect of schooling level and schooling
  accumulation in spurring growth of
  skill-intensive sectors.
• Controlling for income.
• Alternative measures of entry restrictions.

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation
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Conclusion
Introduction Model Estimation Empirical
Results Conclusion

• Potential effect of entry restrictions on
  intersectoral factor reallocation?
• - Slow down the entry of new varieties and
  therefore intersectoral factor reallocation
  towards expanding industries.
• Do entry restrictions matter for intersectoral
  reallocation empirically?
• - Yes countries where new businesses can be
  incorporated more quickly see faster employment
  growth in globally expanding industries.

Ciccone Papaioannou Entry Regulation and
Intersectoral Reallocation