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Entry Regulation and Intersectoral Reallocation

Entry Regulation and Intersectoral Reallocation. Antonio Ciccone and Elias Papaioannou UPF-ICREA & CEPR Dartmouth College, NBER & CEPR. Bank of Greece March 2012. Introduction – Model – Estimation – Empirical Results – Conclusion.

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Entry Regulation and Intersectoral Reallocation

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  1. Entry Regulation and Intersectoral Reallocation Antonio Ciccone and Elias Papaioannou UPF-ICREA & CEPRDartmouth College, NBER & CEPR Bank of Greece March 2012

  2. Introduction – Model – Estimation – Empirical Results – Conclusion Motivation: Entry Restrictions and Productivity How do entry restrictions (delays) affect inter-sectoral 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 product varieties. • Theory implies that in response to global sectoral shocks there is less factor reallocation in economies with tighter restrictions compared to the frictionless benchmark. • Test this prediction in the 1980s and 1990s using two different proxies for frictionless benchmark reallocation and two different econometric techniques(that account for some serious shortcomings of previous works). Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  3. Introduction – Model – Estimation – Empirical Results – Conclusion Existing Theoretical Literature 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. Pissarideset al., 2001) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  4. Introduction – Model – Estimation – Empirical Results – Conclusion Existing Theoretical Literature 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. Pissarideset al., 2001) Focus here • Interaction between entry restrictions/delays and economic shocks • Examine link: entry restrictions/delays  intersectoral factor reallocation • Through inter-sectoral factor (employment) reallocation, the level of entry regulation affects the growth rate of productivity. Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  5. Introduction – Model – Estimation – Empirical Results – Conclusion Empirical Literature on Entry (Product Market Regulation) Regulation 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 Kramarz (2002); Bruhn (2007); Aghion, et al. (2008); Yakovlev and Zhuravskaya (2007); Ardagna and Lusardi (2008, 2010). Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  6. Other Related Strands of the Literature Financial Development and Entry King and Levine (1991); Rajan and Zingales (1998); Beck et al. (2008); Desai et al. (2005); Aghion et al. (2007); see Levine (2005) for a review Interplay between (product and labor market) regulation with economic shocks Krueger and Pischke (1998); Blanchard (2000); Blanchard and Wolfers (2000); Caballero et al. (2005).

  7. Introduction – Model – Estimation – Empirical Results – Conclusion Presentation Overview • Theory • Model set-up • Equilibrium analysis when adjustment is frictionless • Global industry shocks and country-industry level (or country-level) entry restrictions • Estimation Issues and Data • Empirical Results • Preliminary Evidence • Formal Regression Analysis • Conclusion Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  8. Introduction – Model – Estimation – Empirical Results – Conclusion Set-Up, Preferences, and Technology • Continuum of countries and sectors (each mass=1). • 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> 1). • Labor only production factor • To produce q of a variety, firms need z=q/A production workers and 1 overhead worker. • There is heterogeneity in productivity A across countries, sectors, and varieties. (parameter γ; smaller values imply less heterogeneity) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  9. Introduction – Model – Estimation – Empirical Results – Conclusion Technology Level and Varieties (marginal variety) A(V,n,i) Each country produces a bit in each industry. 0 V(n,i) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  10. Introduction – Model – Estimation – Empirical Results – Conclusion Technology Shock and Varieties (marginal variety) A(V,n,i) 0 V(n,i) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  11. Introduction – Model – Estimation – Empirical Results – Conclusion Demand CES functional form Price of a particular variety • Increases in world income • Increases in with prices charges by firms in the same industry (both across the world and within the same country) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  12. Introduction – Model – Estimation – Empirical Results – Conclusion Market Structure and Equilibrium • Each firm produces a distinct variety and sets price to maximize profits • Firms are charging a constant mark-up over marginal cost. • Varieties that are produced less efficiently are sold more expensively. • 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

  13. Introduction – Model – Estimation – Empirical Results – Conclusion Profit Maximization Employment (production workers (z)) of the Marginal Variety and Number of Varieties z(v,n,i) 0 V Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  14. Introduction – Model – Estimation – Empirical Results – Conclusion Zero-Profit Variety Range at each Country-Industry z(v,n,i) z0ni 0 V(n,i) V Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  15. Introduction – Model – Estimation – Empirical Results – Conclusion Adjustment to Global Sectoral Shocks Shocks to technology (Ani) 3 components: • country level (ρn) • industry level (σi) • country industry level (uni) [E(uni)=0] Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  16. Introduction – Model – Estimation – Empirical Results – Conclusion Adjustment to Global Sectoral Shocks Shocks to technology (Ani) 3 components: • country level (ρn) • industry level (σi) • country industry level (uni) [E(uni)=0] Key role for industry adjustment price response shock Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  17. Introduction – Model – Estimation – Empirical Results – Conclusion Frictionless Intersectoral Employment Adjustment General Equilibrium Effect Direct Effect Average (across sectors) shock in a country Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  18. Introduction – Model – Estimation – Empirical Results – Conclusion Adjustment of Varieties with Country-Industry Specific Entry Restrictions (delta) 0 Cut-off shock Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  19. Introduction – Model – Estimation – Empirical Results – Conclusion Factor Adjustment: Industry Employment Growth ε Extensive Margin Only Intensive & Extensive Margin Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  20. Introduction – Model – Estimation – Empirical Results – Conclusion Industry Shocks and Employment Growth in General Equilibrium 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

  21. Introduction – Model – Estimation – Empirical Results – Conclusion Industry Shocks and Employment Growth in General Equilibrium 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

  22. Introduction – Model – Estimation – Empirical Results – Conclusion Adjustment with Country-Specific Entry Restrictions entry inaction (extensive & intensive) exit Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  23. Introduction – Model – Estimation – Empirical Results – Conclusion Industry Expected Employment Growth and Global Industry Shocksneed to integrate the country-industry shock to focus on the global shock Quadratic approximation insand Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  24. Introduction – Model – Estimation – Empirical Results – Conclusion Model Estimating Equation 1 Industry frictionlessglobal employment growth Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  25. Introduction – Model – Estimation – Empirical Results – Conclusion Model Estimating Equation 1 Industry frictionlessglobal employment growth Model Estimating Equation 2 Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  26. Introduction – Model – Estimation – Empirical Results – Conclusion Proxies for Frictionless Employment Reallocation in Response to Global Shocks • 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, AER 1998).  Idiosyncrasies of benchmark country introduces measurement error.  Measurement error 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 frictions) employment reallocation might not reflect industry shocks (Ciccone and Papaioannou, 2010).  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

  27. Introduction – Model – Estimation – Empirical Results – Conclusion 2 Proxy Measures of Frictionless Employment Growth • US Employment Growth (US-EMPGRi) • Global Frictionless Employment Growth (G-EMPGRi ) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  28. Introduction – Model – Estimation – Empirical Results – Conclusion Data • Country-Industry Level (from UNIDO) • Log change in employment (in the eighties and in the 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 (QJE 2002); focus on time to start business (model emphasis on delays) • Other controls (labor market regulation, financial development, income) • Industry-level • US Employment growth (proxy 1) • Global employment reallocation in a frictionless economy (proxy 2) • Other industry measures (external finance dependence, skill intensity, etc). Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  29. Introduction – Model – Estimation – Empirical Results – Conclusion Preliminary evidence:Model prediction of negative relationship between frictionless employment growth and the marginal industry effect of entry delays bi Frictionless employment growth 0 US-EMPGRi or G-EMPGRi Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  30. Introduction – Model – Estimation – Empirical Results – Conclusion Marginal Effect of Entry Delaysand Frictionless Employment Growth in the 1980s Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  31. Introduction – Model – Estimation – Empirical Results – Conclusion Marginal Effect of Entry Delaysand Frictionless Employment Growth in the 1990s Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  32. Introduction – Model – Estimation – Empirical Results – Conclusion Marginal Effect of Entry Delaysand Frictionless Employment Growth (differences between the 1990s & 1980s) Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  33. Introduction – Model – Estimation – Empirical Results – Conclusion Estimation • LS using US industry employment growth to proxy frictionless reallocation • LS using estimated global (non-US) frictionless industry employment growth. • 2SLS using estimated global (non-US) frictionless industry employment growth as an “instrument” for actual US employment growth. 1st Stage Figures Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  34. Introduction – Theory – Estimation – Empirical Results – Conclusion LS Estimates – Benchmark Measure I (US) Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  35. Introduction – Theory – Estimation – Empirical Results – Conclusion LS Estimates – Benchmark Measure II (GLOBAL) Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  36. 1st Stage Figures Introduction – Model – Estimation – Empirical Results – Conclusion IV Estimates – Combining the two proxy measures of frictionless employment reallocation Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  37. Introduction – Model – Estimation – Empirical Results – Conclusion Sensitivity Checks • Differential effect of financial development for external finance dependent sectors (Rajan and Zingales, AER 1998) and sectors with good opportunities (Fisman and Love, JEEA 2007). [Table] • Positive effect of schooling level and schooling accumulation in spurring growth of skill-intensive sectors (Ciccone and Papaioannou, REcStat 2008). [Table] • Controlling for income. [Table] • Alternative country-level proxy measures of entry regulation • Number of administrative procedures to start a firm (from Djankov et al. (2002)) • OECD product (and entry) market regulation indicators • Frazer Institute’s index on regulatory burdens to firm entry Ciccone & Papaioannou:Entry Regulation and Intersectoral Reallocation

  38. Introduction – Model – Estimation – Empirical Results – Conclusion Conclusion Potential effect of entry restrictions on productivity through impeding intersectoral factor reallocation? • Slow down the entry of new varieties in response to shocks and therefore block intersectoral factor reallocation towards globally expanding industries. Do entry restrictions matter for intersectoral reallocation empirically? • Yes; countries where new businesses can be incorporated more quickly have seen faster employment growth in globally expanding industries both in the 1980s and the 1990s (though there were different manufacturing sectors with good prospects in the two decades). Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  39. Appendix Figures and Tables • Figure: US employment growth against global frictionless employment growth in the 1980s (first-stage fit) • Figure: US employment growth against global frictionless employment growth in the 1990s (first-stage fit) • Controlling for financial underdevelopment • Controlling for human capital • Controlling for economic underdevelopment Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  40. IV Results Introduction – Theory – Estimation – Empirical Results – Conclusion Proxies of Frictionless Employment Growth in the 1980s Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  41. IV Results Introduction – Theory – Estimation – Empirical Results – Conclusion Proxies of Frictionless Employment Growth in the 1990s Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  42. Results Preview Introduction – Theory – Estimation – Empirical Results – Conclusion Controlling for financial underdevelopment Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  43. Results Preview Introduction – Theory – Estimation – Empirical Results – Conclusion Controlling for human capital (level and accumulation) Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

  44. Results Preview Introduction – Theory – Estimation – Empirical Results – Conclusion Controlling for economic underdevelopment Ciccone Papaioannou:Entry Regulation and Intersectoral Reallocation

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