What is the Impact of Increased Business Competition?

58 Pages Posted: 22 Jan 2020

See all articles by Sonia Feliz

Sonia Feliz

Bank of Portugal

Chiara Maggi

International Monetary Fund (IMF)

Date Written: December 2019

Abstract

This paper studies the macroeconomic effect and underlying firm-level transmission channels of a reduction in business entry costs. We provide novel evidence on the response of firms' entry, exit, and employment decisions. To do so, we use as a natural experiment a reform in Portugal that reduced entry time and costs. Using the staggered implementation of the policy across the Portuguese municipalities, we find that the reform increased local entry and employment by, respectively, 25% and 4.8% per year in its first four years of implementation. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the most productive firms. Standard models of firm dynamics, which assume a constant elasticity of substitution, are inconsistent with the expansionary and heterogeneous response across incumbent firms. We show that in a model with heterogeneous firms and variable markups the most productive firms face a lower demand elasticity and expand their employment in response to increased entry.

Keywords: Supply and demand, Job creation, Labor force, Demand elasticity, European Economic and Monetary Union, What is the Impact of Increased Business Competition?, WP, municipality level, entry cost, pre-reform, empirical analysis, local employment

JEL Classification: E23, E24, E65, L53, E2, E01, D4, J3, E52

Suggested Citation

Feliz, Sonia and Maggi, Chiara, What is the Impact of Increased Business Competition? (December 2019). IMF Working Paper No. 19/276, Available at SSRN: https://ssrn.com/abstract=3523149

Sonia Feliz (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Chiara Maggi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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