Regulation, Institutions, and Productivity Growth

Abstract

This dissertation investigates how the investment climate affects firm dynamics, productivity, and macroeconomic performance across countries. The first chapter provides an empirical analysis of the macroeconomic impact of business regulation. It characterizes the stylized facts on regulation across the world, using a set of comprehensive indicators of regulation in a large number of countries. These indicators are used to study the effects of regulation on growth and volatility employing cross-country regression analysis. The analysis allows for the effects of regulation to vary with the country's level of institutional development, and it also controls for the likely endogeneity of regulation with respect to macroeconomic performance. Results show that a heavier regulatory burden reduces growth and increases volatility, although these effects are smaller the higher the quality of the overall institutional framework. The second chapter focuses on the mechanism through which regulation impacts on macroeconomic outcomes, and assesses the role of firm entry and exit as channel of transmission of the effects of regulation on productivity growth. We use sector and manufacturing-wide productivity and firm turnover data derived from firm-level information for OECD and Latin American countries to explore the effects of various types of regulations following a two-step approach. The first step examines the impact of regulation on firm turnover. The second assesses the effects of firm turnover on productivity growth. Results provide partial evidence that regulation, particularly product market regulation, hampers productivity growth by deterring firm entry and exit. The third chapter investigates the effects of regulation uncertainty on the innovative behavior of firms, and on the efficiency of the Schumpeterian "creative destruction" process. It argues that regulation uncertainty, caused by a poor institutional environment, distorts the selection process of firms and leads to high observed reallocation, but low productivity. Following Hopenhayn (1992), an industry is modeled where firms engage in innovative investment and face an uncertain innovation cost. The analysis centers on the entry and exit decision of firms, their innovative behavior, and the subsequent industry evolution. In equilibrium, a more uncertain cost creates distortions in the reallocation process that lead to lower average productivity, size, and innovative investments, having similar effects as an increase in the magnitude of the cost. This indicates that, in addition to the level of regulation, unpredictability of regulation is an important source of inefficiency in the reallocation process.