1. Product Market Reform and Growth: New Country-Sector-Level Evidence
Romain Duval (IMF)
with Romain Bouis and Johannes Eugster (IMF)
2017 Annual Meetings of the ASSA
Chicago, January 7th, 2017

2. Introduction: literature
Voluminous theoretical and empirical (macro, sector and firm-level) literature on impact of product market deregulation on output through higher productivity and/or employment:
Theory: Blanchard and Giavazzi, 2003; Ebell and Haefke, 2009; Fang and Rogerson, 2011; Felbermayr and Prat, 2011
Country/sector-level empirical studies: Aghion et al., 2009; Alesina et al., 2005; Bassanini and Duval, 2009; Barone and Cingano, 2011; Bourlès et al., 2013; Cette et al., 2016; Conway et al., 2006; Egert, 2016; Fiori et al., 2012; Inklaar et al., 2008; Nicoletti and Scarpetta, 2003
Firm-level empirical studies: Aghion et al., 2004, 2009; Gal and Hijzen, 2016

3. Introduction: short-term effects of deregulation
Short-term/dynamic effects of product market deregulation largely unknown:
Literature has focused on long-term effect (theory, country/sector-level studies), or short-term firm-level effect without addressing GE effect (firm- level studies)
Theory unsettled—product and labor market frictions could imply ST costs (Cacciatore and Fiori, 2015; Cacciatore, Duval, Ghironi and Fiori, 2016a,b):
Standard DSGE models fail to capture the relevant frictions.
Disappearance of incumbents and associated sunk costs (e.g. loss of firm- specific human capital); sunk entry costs need to be financed.
Non-profit maximization and X-inefficiency, firm strategic behavior (strategic capital accumulation vs. scrapping).

4. Introduction: this paper
Empirical analysis of dynamic effects of product market deregulation in network industries at country-sector level
New, unique dataset of major reform shocks in electricity and gas, rail and road transport, air transport, telecoms, postal services for 26 countries over
Dynamic impact at country-sector level estimated through local projection method (Jorda AER 2005) used e.g. by Romer & Romer AER 2015 for impact of financial crises.
Novel instrumentation of reform shocks using instruments derived from legislative and political economy considerations.

5. Data
Duval, Furceri, Jalles and Nguyen (forthcoming): “narrative” approach to identify major legislative and regulatory actions based on OECD Economic Surveys and additional country-specific sources. See e.g. Romer and Romer’s papers on fiscal, monetary and—closest to our paper—financial crisis shocks.
Alternative criteria to identify reforms: (i) normative language; (ii) actions mentioned several times across different surveys and/or in retrospective assessments; (iii) large corresponding changes in OECD ETCR indicators.
Advantages compared to existing databases: (i) identification of major events; (ii) exact timing; (iii) exact actions underpinning indicator changes; (iv) larger country and time coverage.
Shortcomings: (i) reforms may be endogenous -> issue addressed in the empirical analysis; (ii) heterogeneity of reform shocks -> average historical impact estimated.
Mapped with OECD STAN ISIC Rev-4 data on outcomes (Y, L, Y/L, I, P, extrapolated backward using ISIC Rev-3 data in some cases).

6. Histogram of reform shocks

7. Descriptive statistics: differences in differences

8. Empirical methodology
Local projection method:
Instrumentation: 3 instruments:
External pressure: presence of competition-related EU Directive (D = 1 if Directive adopted over the past 5 years but not yet implemented in the country considered)
Peer pressure: number of other countries having carried out reform in the same sector over the past 3 years.
Scope for reform: initial stance of regulation in sector considered, measured as OECD regulatory indicator value lagged three years

9. OLS results
Baseline Results with Country-Industry and Country-Year FE and Industry-specific trend. Cluster robust standard errors at country-industry level. Dotted lines indicate 90%- and 95% confidence intervals.

10. IV results
IV Results with Country-Industry and Country-Year FE and Industry-specific trend. Cluster robust standard errors at country-industry level. Dotted lines indicate 90%- and 95% confidence intervals.

11. Conclusion
New analysis of dynamic growth impact of product market deregulation in network industries, applying local projection method with novel IV strategy to new “narrative” dataset of major reform shocks
Large medium-term gains from major reform in deregulated industries: % increase in real VA after 5 years, on average
Mostly a productivity effect, concomitant with relative (VA) price decline
Gains materialize only gradually (no significant effect before about 3 years) but no evidence of short-term costs.
No significant effect at sector level on employment and investment: downsizing of incumbents vs. entry of new firms?
Significant employment gains where job protection is more stringent, however, in line with economic theory (see paper)

12. Supplementary Slides

13. IV estimation: rationale

14. OLS results: real value added

15. IV results: real value added