Red Tape Reduction, More New Firms? Saving Time and Money: Evidence from an Ecuadorian Reform

Segundo Camino-Mogro and Grace Armijos Bravo

Journal of Development Studies, 2023, vol. 59, issue 5, 691-715

Abstract: Reducing entry costs like bureaucratic procedures might be useful tool for stimulating new firm creation in a country. We exploit an unexpected reform that targets the physical (face-to-face) service channel, offering a decline in these types of costs in the firm creation process in Ecuador. To do this, we rely on a novel and underexplored administrative dataset and apply a difference-in-differences approach which compares physical (in-person) with electronic firm creation schemes before and after the implementation of the policy. We find that the reform increases the number of new firms by approximately 12.05% and the entry rate by approximately 108% in the short term. We also find that the impact varies across provinces and economic sectors. In addition, we find a decrease in the average number of days needed to create a new firm and an increase in the probability of creating a new firm with less initial minimum capital. The main conclusion is that the reform effectively contributes to increasing new firm creation in Ecuador. This matters from a policy perspective in a country with a high share of unregistered business.

Date: 2023
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DOI: 10.1080/00220388.2022.2154149

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