Working Paper: NBER ID: w18657
Authors: Francois Gourio; Nicolas A. Roys
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: size-dependent regulations; firm size distribution; labor allocation
JEL Codes: E23; L11; L25; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulation (L51) | distortion in firm size distribution (D39) |
| Sunk cost + Payroll tax (H29) | distortion in firm size distribution (D39) |
| Regulation (L51) | misallocation of labor (J29) |
| misallocation of labor (J29) | decrease in output per worker (J29) |
| Removing regulation (L51) | increase in output per worker (O49) |
| Elastic firm entry (D43) | reduction in predicted increase in output (E23) |