Product regulations and persistence of profits: OECD evidence

Johan Eklund () and Emma Lappi ()
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Emma Lappi: Swedish Entrepreneurship Forum

Journal of Regulatory Economics, 2018, vol. 54, issue 2, No 3, 147-164

Abstract: Abstract In competitive markets, profits deviating from the norm will not persist for extended periods. If unimpeded, entry and exit of firms should restore profits to competitive levels. This dynamic process is influenced by regulations that temporarily or permanently impede competition. We study how product market regulations (PMR)—as measured by the OECD—affect competition by their impact on the profit persistence (Wölfl et al. in Ten years of product market reform in OECD countries-insights from a revised PMR indicator, 2009, Product market regulation: extending the analysis beyond OECD countries, 2010). To examine profit dynamics, we follow the methodology developed by Mueller (Economica 44(176):369–380, 1977), which measures both the short run persistence of profits and the long run permanent rents. The method can be used to measure: (1) short run transitory rents; (2) long run permanent rents. To this end we use firm level data from 30 OECD countries over the period 1998–2013. Results show that PMR increase the permanent rents of firms but we find no significant effect on short run profit persistence. We conclude that PMR negatively influence competition and increase permanent rents, resulting in misallocation of resources.

Keywords: Profits; Persistence of profits; Competition; Product market regulation; Regulations; Entry (search for similar items in EconPapers)
JEL-codes: L12 L22 L43 L50 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11149-018-9365-y

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