The Impact of Regulation on Innovation

Aghion, Philippe; Bergeaud, Antonin; van Reenen, John

The Impact of Regulation on Innovation

Philippe Aghion (), Antonin Bergeaud and John van Reenen
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Philippe Aghion: INSEAD - Institut Européen d'administration des Affaires, LSE - London School of Economics and Political Science, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Collège de France - Chaire Economie des institutions, de l'innovation et de la croissance - CdF (institution) - Collège de France

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Abstract: We present a framework that can be used to assess the equilibrium impact of regulation on endogenous innovation with heterogeneous firms. We implement this model using French firm-level panel data, where there is a sharp increase in the burden of labor regulations on companies with 50 or more employees. Consistent with the model's qualitative predictions, we find a fall in the fraction of innovating firms just to the left of the regulatory threshold. Furthermore, we find a reduction in the innovation response of firms to demand shocks just below the threshold. Regulation reduces aggregate innovation by 5.7 percent.

Date: 2023-11
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Published in American Economic Review, 2023, 113 (11), pp.2894-2936. ⟨10.1257/aer.20210107⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-04330712

DOI: 10.1257/aer.20210107

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