Endogenous deregulation: evidence from OECD countries Duo and Roller, Economics Letters, 2003, 67-71

Introduction Does deregulation affect productivity? (competition effect) Is deregulation independent, or does it depend on other variables, such as political and institutional factors? (selection effect) If we ignore second effect, do we overestimate the competition effect?

Literature Review Deregulation by increasing competition increases productivity. More firms are allowed to produce which will affect per unit costs, quality, welfare. However, the decision to deregulate may not be independent (or exogenous). It may depend on other factors. Ignoring this relationship may over estimate the competitive effect. Wilson (1993) for a survey.

Model Let s be the policy decision and q be the productivity. Then policy equation is: Market equation is defined as The objective is to correctly estimate the effect of deregulation on productivity

Data Data period is OECD International Regulations Database

DATA: VARIABLE DEFINITIONS s: ENTRY= 1,2,3 (for monopoly, duopoly, and oligopoly) q: PRODUCTIVITY: total subscribers per employee Instruments for political institutions: MAJORITARIAN, PRESIDENTIAL. Instruments for regulatory institutions: ACCOUNTABILITY, INDEPENDENCE, RILE, PROREG. Demand variables: GDP, Pop Cost Variables: Investment per employee, Wage exp. per employee, Time Trend:

Empirical Results

In OLS regressions (ignoring simultaneity) is and significant at 1% level. In Simultaneous systems the coefficient is and still significant (at 10% level). OLS estimation overestimates the effect.

Empirical Results Others…. In deregulation equation, –most of the political variables and institutional variables are significant with expected signs. –The productivity variables is positive and significant. In the productivity equation, –Entry is positive and significant but the value is less.

Conclusions The impact of deregulation on productivity is positive and significant. If it is estimated in a model which ignores simultaneity it is overestimated

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