Working Paper: NBER ID: w10929
Authors: Raymond Fisman; Virginia Sarria-Allende
Abstract: We study the distortions to industrial organization caused by entry regulation. We take advantage of heterogeneity across industries in their natural barriers and growth opportunities to examine whether some industries are differentially affected by country-level entry regulation. In industries with high natural entry barriers, entry regulation has little impact on the quantity and average size of firms in an industry. By contrast, in industries with low natural entry barriers, countries with high entry regulation have relatively few, large firms. We find no relation between natural entry barriers and overall industry share of manufacturing, as a function of entry regulation. Utilizing firm-level data, we show that operating margins are relatively high in low barrier industries in high entry regulation countries. Finally, we analyze the ability of industries to take advantage of shocks to growth opportunities. In countries with high entry regulation, industries respond to growth opportunities through the expansion of existing firms, while in countries with low entry regulation, the response is through the creation of new firms; the total sectoral response is invariant to the level of regulation. Our results suggest that regulation distorts the structure of industry, promoting industry concentration, but does not have measurable effects on intersectoral allocations.
Keywords: Entry Regulation; Industrial Organization; Market Structure
JEL Codes: O14; K2; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry regulation (Y20) | number and size of firms (L25) |
| entry regulation (Y20) | presence of large firms (L25) |
| entry regulation (Y20) | operating margins (L21) |
| entry regulation (Y20) | strategic choices of firms (L21) |
| natural entry barriers + entry regulation (L59) | number and size of firms (L25) |
| natural entry barriers + entry regulation (L59) | presence of large firms (L25) |
| entry regulation (Y20) | firm dynamics (D21) |