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Size-dependent regulations, firm size distribution, and reallocation

Francois Gourio and Nicolas Roys

No WP-2013-11, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: In France, firms with 50 employees or more face substantially more regulation than firms with less than 50. As a result, the size distribution of firms is visibly distorted: there are many firms with exactly 49 employees. We model the regulation as the combination of a sunk cost that must be paid the first time the firm reaches 50 employees, and a payroll tax that is paid each period thereafter when the firm operates with more than 50 employees. We estimate the model using indirect inference by fitting the discontinuity of the size distribution. The key finding is that the regulation is equivalent to a combination of a sunk cost approximately equal to about one year of an average employee salary, and a small payroll tax of 0.04%. Our structural model fits well the discontinuity in the size distribution. Removing the regulation improves labor allocation across firms, leading in steady-state to an increase in output per worker slightly less than 0.3%, holding the number of firms fixed. However, if firm entry is elastic, the steady-state gains are an order of magnitude smaller.

Keywords: Employment (Economic theory); Wages (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ent and nep-lma
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Citations: View citations in EconPapers (34)

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Related works:
Journal Article: Size‐dependent regulations, firm size distribution, and reallocation (2014) Downloads
Working Paper: Size-Dependent Regulations, Firm Size Distribution, and Reallocation (2013)
Working Paper: Size-Dependent Regulations, Firm Size Distribution, and Reallocation (2012) Downloads
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