1. Entry Regulation and Intersectoral Reallocation
Antonio Ciccone and Elias Papaioannou
UPF-ICREA & CEPR Dartmouth College, NBER & CEPR
Bank of Greece
March 2012

2. Motivation: Entry Restrictions and Productivity
Introduction – Model – Estimation – Empirical Results – Conclusion
Motivation: Entry Restrictions and Productivity
How do entry restrictions (delays) affect inter-sectoral factor reallocation when open economies are hit by global industry shocks?
Multi-sector world equilibrium model where countries put upper bound on entry of new product varieties.
Theory implies that in response to global sectoral shocks there is less factor reallocation in economies with tighter restrictions compared to the frictionless benchmark.
Test this prediction in the 1980s and 1990s using two different proxies for frictionless benchmark reallocation and two different econometric techniques (that account for some serious shortcomings of previous works).
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

3. Existing Theoretical Literature
Introduction – Model – Estimation – Empirical Results – Conclusion
Existing Theoretical Literature
Entry costs  economic efficiency
Technology adoption (e.g. Parente and Prescott, 1994)
Industry efficiency (e.g. Hopenhayn, 1992)
Product variety (e.g. Dixit and Stiglitz, 1978)
Market power (e.g. Stigler, 1971).
Entrepreneurship and employment (e.g. Pissarides et al., 2001)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

4. Existing Theoretical Literature
Introduction – Model – Estimation – Empirical Results – Conclusion
Existing Theoretical Literature
Entry costs  economic efficiency
Technology adoption (e.g. Parente and Prescott, 1994)
Industry efficiency (e.g. Hopenhayn, 1992)
Product variety (e.g. Dixit and Stiglitz, 1978)
Market power (e.g. Stigler, 1971).
Entrepreneurship and employment (e.g. Pissarides et al., 2001)
Focus here
Interaction between entry restrictions/delays and economic shocks
Examine link: entry restrictions/delays  intersectoral factor reallocation
Through inter-sectoral factor (employment) reallocation, the level of entry regulation affects the growth rate of productivity.
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

5. Empirical Literature on Entry (Product Market Regulation) Regulation
Introduction – Model – Estimation – Empirical Results – Conclusion
Empirical Literature on Entry (Product Market Regulation) Regulation
Measurement of entry costs and delays
De Soto (1989); Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2002); World Bank (Doing Business Around the World); OECD (Regulation Database)
Entry regulation and entrepreneurship/growth
Fisman and Sarria-Allende (2004); Klapper, Laeven, and Rajan (2006); Nicoletti and Scarpetta (2001, 2002, 2006); Alesina, et al. (2005); Bertrand and Kramarz (2002); Bruhn (2007); Aghion, et al. (2008); Yakovlev and Zhuravskaya (2007); Ardagna and Lusardi (2008, 2010).
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

6. Other Related Strands of the Literature
Financial Development and Entry
King and Levine (1991); Rajan and Zingales (1998); Beck et al. (2008); Desai et al. (2005); Aghion et al. (2007); see Levine (2005) for a review
Interplay between (product and labor market) regulation with economic shocks
Krueger and Pischke (1998); Blanchard (2000); Blanchard and Wolfers (2000); Caballero et al. (2005).

7. Presentation Overview
Introduction – Model – Estimation – Empirical Results – Conclusion
Presentation Overview
Theory
Model set-up
Equilibrium analysis when adjustment is frictionless
Global industry shocks and country-industry level (or country-level) entry restrictions
Estimation Issues and Data
Empirical Results
Preliminary Evidence
Formal Regression Analysis
Conclusion
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

8. Set-Up, Preferences, and Technology
Introduction – Model – Estimation – Empirical Results – Conclusion
Set-Up, Preferences, and Technology
Continuum of countries and sectors (each mass=1).
Each sector is made up of freely traded varieties, differentiated by country of origin.
Range of available varieties is endogenous.
Symmetric Cobb-Douglas preferences across industries (equal expenditure shares across industries).
Symmetric Constant-Elasticity-of Substitution within industries (substitution elasticity: e > 1).
Labor only production factor
To produce q of a variety, firms need z=q/A production workers and 1 overhead worker.
There is heterogeneity in productivity A across countries, sectors, and varieties. (parameter γ; smaller values imply less heterogeneity)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

9. Technology Level and Varieties (marginal variety)
Introduction – Model – Estimation – Empirical Results – Conclusion
Technology Level and Varieties (marginal variety)
A(V,n,i)
Each country produces a bit in each industry.
V(n,i)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

10. Technology Shock and Varieties (marginal variety)
Introduction – Model – Estimation – Empirical Results – Conclusion
Technology Shock and Varieties (marginal variety)
A(V,n,i)
V(n,i)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

11. Demand CES functional form Price of a particular variety
Introduction – Model – Estimation – Empirical Results – Conclusion
Demand
CES functional form
Price of a particular variety
Increases in world income
Increases in with prices charges by firms in the same industry (both across the world and within the same country)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

12. Market Structure and Equilibrium
Introduction – Model – Estimation – Empirical Results – Conclusion
Market Structure and Equilibrium
Each firm produces a distinct variety and sets price to maximize profits
Firms are charging a constant mark-up over marginal cost.
Varieties that are produced less efficiently are sold more expensively.
Goods markets clear internationally.
Wages adjust to clear national labor markets. (Labor supply is inelastic and constant in time.)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

13. Introduction – Model – Estimation – Empirical Results – Conclusion
Profit Maximization Employment (production workers (z)) of the Marginal Variety and Number of Varieties
z(v,n,i) V
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

14. Zero-Profit Variety Range at each Country-Industry
Introduction – Model – Estimation – Empirical Results – Conclusion
Zero-Profit Variety Range at each Country-Industry
z(v,n,i)
z0ni
V(n,i) V
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

15. Adjustment to Global Sectoral Shocks
Introduction – Model – Estimation – Empirical Results – Conclusion
Adjustment to Global Sectoral Shocks
Shocks to technology (Ani)
3 components:
country level (ρn)
industry level (σi)
country industry level (uni) [E(uni)=0]
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

16. Adjustment to Global Sectoral Shocks
Introduction – Model – Estimation – Empirical Results – Conclusion
Adjustment to Global Sectoral Shocks
Shocks to technology (Ani)
3 components:
country level (ρn)
industry level (σi)
country industry level (uni) [E(uni)=0]
Key role for industry adjustment
price response
shock
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

17. Frictionless Intersectoral Employment Adjustment
Introduction – Model – Estimation – Empirical Results – Conclusion
Frictionless Intersectoral Employment Adjustment
General Equilibrium Effect
Direct Effect
Average (across sectors) shock in a country
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

18. Introduction – Model – Estimation – Empirical Results – Conclusion
Adjustment of Varieties with Country-Industry Specific Entry Restrictions (delta)
Cut-off shock
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

19. Factor Adjustment: Industry Employment Growth
Introduction – Model – Estimation – Empirical Results – Conclusion
Factor Adjustment: Industry Employment Growth ε
Extensive Margin Only
Intensive & Extensive Margin
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

20. Industry Shocks and Employment Growth in General Equilibrium
Introduction – Model – Estimation – Empirical Results – Conclusion
Industry Shocks and Employment Growth in General Equilibrium
Employment Growth
Economy with less restricted entry
Economy with more restricted entry
Industry Shock
C zone
B zone
A zone
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

21. Industry Shocks and Employment Growth in General Equilibrium
Introduction – Model – Estimation – Empirical Results – Conclusion
Industry Shocks and Employment Growth in General Equilibrium
Employment Growth
Economy with less restricted entry
Economy with more restricted entry
Industry Shock
C zone
B zone
A zone
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

22. Adjustment with Country-Specific Entry Restrictions
Introduction – Model – Estimation – Empirical Results – Conclusion
Adjustment with Country-Specific Entry Restrictions
entry
inaction
(extensive & intensive)
exit
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

23. Introduction – Model – Estimation – Empirical Results – Conclusion
Industry Expected Employment Growth and Global Industry Shocks need to integrate the country-industry shock to focus on the global shock
Quadratic approximation in s and 
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

24. Model Estimating Equation 1
Introduction – Model – Estimation – Empirical Results – Conclusion
Model Estimating Equation 1
Industry frictionless global employment growth
Frictionless (prompt entry) industry employment growth
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

25. Model Estimating Equation 1
Introduction – Model – Estimation – Empirical Results – Conclusion
Model Estimating Equation 1
Industry frictionless global employment growth
Model Estimating Equation 2
Frictionless (prompt entry) industry employment growth
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

26. Introduction – Model – Estimation – Empirical Results – Conclusion
Proxies for Frictionless Employment Reallocation in Response to Global Shocks
Benchmark-country approach: use data from a country with low levels of entry regulation, where employment growth is unlikely to reflect frictions in product (or labor or capital) markets (Rajan and Zingales, AER 1998).
 Idiosyncrasies of benchmark country introduces measurement error.
 Measurement error does not necessarily take the “classical form.”
Global estimation approach: estimate global employment reallocation in a frictionless economy using data on all countries and accounting for the fact that in countries with high barriers to entry (or other frictions) employment reallocation might not reflect industry shocks (Ciccone and Papaioannou, 2010).
 Does not reflect idiosyncrasies of any country.
 Must be treated as a generated regressor.
(Consistency of estimates under quite weak conditions. Valid standard errors somewhat more complicated. See Wooldridge 2002.)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

27. 2 Proxy Measures of Frictionless Employment Growth
Introduction – Model – Estimation – Empirical Results – Conclusion
2 Proxy Measures of Frictionless Employment Growth
US Employment Growth (US-EMPGRi)
Global Frictionless Employment Growth (G-EMPGRi )
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

28. Data Country-Industry Level (from UNIDO)
Introduction – Model – Estimation – Empirical Results – Conclusion
Data
Country-Industry Level (from UNIDO)
Log change in employment (in the eighties and in the nineties).
55-45 countries; manufacturing industries (more than 1,000 obs.)
Country-Level
Entry restriction indicators from Djankov, La Porta, Lopez-de-Silanes and Shleifer (QJE 2002); focus on time to start business (model emphasis on delays)
Other controls (labor market regulation, financial development, income)
Industry-level
US Employment growth (proxy 1)
Global employment reallocation in a frictionless economy (proxy 2)
Other industry measures (external finance dependence, skill intensity, etc).
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

29. Frictionless employment growth
Introduction – Model – Estimation – Empirical Results – Conclusion
Preliminary evidence: Model prediction of negative relationship between frictionless employment growth and the marginal industry effect of entry delays bi
Frictionless employment growth
US-EMPGRi or G-EMPGRi
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

30. Introduction – Model – Estimation – Empirical Results – Conclusion
Marginal Effect of Entry Delays and Frictionless Employment Growth in the 1980s
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

31. Introduction – Model – Estimation – Empirical Results – Conclusion
Marginal Effect of Entry Delays and Frictionless Employment Growth in the 1990s
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

32. Introduction – Model – Estimation – Empirical Results – Conclusion
Marginal Effect of Entry Delays and Frictionless Employment Growth (differences between the 1990s & 1980s)
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

33. Introduction – Model – Estimation – Empirical Results – Conclusion
LS using US industry employment growth to proxy frictionless reallocation
LS using estimated global (non-US) frictionless industry employment growth.
2SLS using estimated global (non-US) frictionless industry employment growth as an “instrument” for actual US employment growth.
1st Stage Figures
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

34. LS Estimates – Benchmark Measure I (US)
Introduction – Theory – Estimation – Empirical Results – Conclusion
LS Estimates – Benchmark Measure I (US)
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

35. LS Estimates – Benchmark Measure II (GLOBAL)
Introduction – Theory – Estimation – Empirical Results – Conclusion
LS Estimates – Benchmark Measure II (GLOBAL)
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

36. 1st Stage Figures
Introduction – Model – Estimation – Empirical Results – Conclusion
IV Estimates – Combining the two proxy measures of frictionless employment reallocation
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

37. Introduction – Model – Estimation – Empirical Results – Conclusion
Sensitivity Checks
Differential effect of financial development for external finance dependent sectors (Rajan and Zingales, AER 1998) and sectors with good opportunities (Fisman and Love, JEEA 2007). [Table]
Positive effect of schooling level and schooling accumulation in spurring growth of skill-intensive sectors (Ciccone and Papaioannou, REcStat 2008). [Table]
Controlling for income. [Table]
Alternative country-level proxy measures of entry regulation
Number of administrative procedures to start a firm (from Djankov et al. (2002))
OECD product (and entry) market regulation indicators
Frazer Institute’s index on regulatory burdens to firm entry
Ciccone & Papaioannou: Entry Regulation and Intersectoral Reallocation

38. Introduction – Model – Estimation – Empirical Results – Conclusion
Potential effect of entry restrictions on productivity through impeding intersectoral factor reallocation?
Slow down the entry of new varieties in response to shocks and therefore block intersectoral factor reallocation towards globally expanding industries.
Do entry restrictions matter for intersectoral reallocation empirically?
Yes; countries where new businesses can be incorporated more quickly have seen faster employment growth in globally expanding industries both in the 1980s and the 1990s (though there were different manufacturing sectors with good prospects in the two decades).
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

39. Appendix Figures and Tables
Figure: US employment growth against global frictionless employment growth in the 1980s (first-stage fit)
Figure: US employment growth against global frictionless employment growth in the 1990s (first-stage fit)
Controlling for financial underdevelopment
Controlling for human capital
Controlling for economic underdevelopment
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

40. Proxies of Frictionless Employment Growth in the 1980s
IV Results
Introduction – Theory – Estimation – Empirical Results – Conclusion
Proxies of Frictionless Employment Growth in the 1980s
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

41. Proxies of Frictionless Employment Growth in the 1990s
IV Results
Introduction – Theory – Estimation – Empirical Results – Conclusion
Proxies of Frictionless Employment Growth in the 1990s
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

42. Controlling for financial underdevelopment
Results Preview
Introduction – Theory – Estimation – Empirical Results – Conclusion
Controlling for financial underdevelopment
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

43. Controlling for human capital (level and accumulation)
Results Preview
Introduction – Theory – Estimation – Empirical Results – Conclusion
Controlling for human capital (level and accumulation)
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation

44. Controlling for economic underdevelopment
Results Preview
Introduction – Theory – Estimation – Empirical Results – Conclusion
Controlling for economic underdevelopment
Ciccone Papaioannou: Entry Regulation and Intersectoral Reallocation