Quantifying the Impact of Red Tape on Investment: A Survey Date Approach

39 Pages Posted: 5 Oct 2023

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: September 2023

Abstract

An important strand of research in macro-finance investigates which factors impede enterprise in- vestment, and what is their aggregate economic 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 in the survey the distortions they face. Our second contribution is to apply our method across seven countries to characterize the distribution of these distortions and estimate the gross domestic product (GDP) loss induced by distortionary red tape. Our estimates are based on a dynamic general equilibrium model with heterogeneous 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 cost of 0.8% of annual GDP. Our framework opens up a new range of applications for enterprise surveys in macro-financial modeling and policy analysis.

Keywords: ureaucracy, Growth, Investment, Legislation, Misallocation, Red Tape, Regulations, Survey

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

Suggested Citation

Pellegrino, Bruno and Zheng, Geoffery, Quantifying the Impact of Red Tape on Investment: A Survey Date Approach (September 2023). George J. Stigler Center for the Study of the Economy & the State Working Paper No. 335, Available at SSRN: https://ssrn.com/abstract=4593370 or http://dx.doi.org/10.2139/ssrn.4593370

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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