Quantifying the Effect of Red Tape on Investment: a Survey Data Approach

39 Pages Posted: 20 Oct 2017 Last revised: 13 Jan 2022

See all articles by Bruno Pellegrino

Bruno Pellegrino

Columbia University - Columbia Business School; University of Chicago - George J. Stigler Center for the Study of the Economy and the State; CESifo (Center for Economic Studies and Ifo Institute)

Geoffery Zheng

New York University (NYU) - New York University (NYU), Shanghai

Date Written: January 13, 2018

Abstract

An important strand of research in macroeconomics and finance investigates which factors impede enterprise investment, and what is their aggregate cost. In this paper, we make two contributions to this literature. The first contribution is methodological: we introduce a novel framework to calibrate macroeconomic models with firm-level distortions using enterprise survey micro-data. The core of our innovation is to explicitly model the firms' decisions to report the distortions they face in the survey. Our second contribution is to apply our method to estimate the GDP loss induced by distortionary red tape, across eighty-five countries. Our estimates are based on a dynamic general equilibrium model with heterogenous firms whose capital investment decisions are distorted by red tape. We find that the aggregate cost of red tape varies widely across the countries in our dataset, with an average of 1.8 to 2.1% of GDP and a total of 1.6 trillion dollars. Our framework opens up a new range of applications for enterprise surveys in macro-financial modeling and policy analysis.

Keywords: Bureaucracy, Capital, Distortions, General Equilibrium, Government, Growth, Investment, Legislation, Misallocation, Red Tape, Regulations, Policy, Survey

JEL Classification: C83, E2, E6, G38, H1, H2, K2, O1, O4

Suggested Citation

Pellegrino, Bruno and Zheng, Geoffery, Quantifying the Effect of Red Tape on Investment: a Survey Data Approach (January 13, 2018). Available at SSRN: https://ssrn.com/abstract=3055973 or http://dx.doi.org/10.2139/ssrn.3055973

Bruno Pellegrino (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

University of Chicago - George J. Stigler Center for the Study of the Economy and the State ( email )

Walker Hall
Chicago, IL 60637
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Geoffery Zheng

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

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