Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences

Hernan Moscoso Boedo and Toshihiko Mukoyama

Virginia Economics Online Papers from University of Virginia, Department of Economics

Abstract: This paper analyzes the effects of entry regulations and firing costs on cross-country differences in income and productivity. We construct a general equilibrium industry- dynamics model and quantitatively evaluate it using the cross-country data on entry costs and firing costs. Entry costs lower overall productivity in an economy by keeping low- productivity establishments in operation and making the establishment size inefficiently large. Firing costs lower productivity by reducing the reallocation of labor from low- productivity establishments to high-productivity establishments. The linear regression of the data on the model prediction accounts for 27% of the cross-sectional variation in total factor productivity. Moving the level of entry costs and firing costs from the U.S. level to that of the average of low income countries (countries with a Gross National Income below 2% of the U.S. level) reduces TFP by 27% in the model without capital, and by 34% in the model with capital and capital adjustment costs.

Keywords: Entry cost; firing cost; international income differences; industry dynamics (search for similar items in EconPapers)
JEL-codes: D24 E23 J65 L11 O11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2011-10
New Economics Papers: this item is included in nep-dge, nep-opm and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Evaluating the effects of entry regulations and firing costs on international income differences (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:vir:virpap:379

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