Size-Dependent Regulations, Firm Size Distribution, and Reallocation

50 Pages Posted: 30 Dec 2012 Last revised: 16 Oct 2014

See all articles by Francois Gourio

Francois Gourio

Federal Reserve Bank of Chicago

Nicolas Roys

University of Wisconsin - Madison - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: December 2012

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.

Suggested Citation

Gourio, Francois and Roys, Nicolas, Size-Dependent Regulations, Firm Size Distribution, and Reallocation (December 2012). NBER Working Paper No. w18657. Available at SSRN: https://ssrn.com/abstract=2194782

Francois Gourio (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/fgourio

Nicolas Roys

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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