This paper analyzes the effects of entry regulations and firing costs on cross-country differences in income and productivity. We construct a general equilibrium industry-dynamics model and quantitatively evaluate it using the cross-country data on entry costs and firing costs. Entry costs lower overall productivity in an economy by keeping low-productivity establishments in operation and making the establishment size inefficiently large. Firing costs lower productivity by reducing the reallocation of labor from low-productivity establishments to high-productivity establishments. The linear regression of the data on the model prediction accounts for 27% of the cross-sectional variation in total factor productivity. Moving the level of entry costs and firing costs from the U.S. level to that of the average of low income countries (countries with a Gross National Income below 2% of the U.S. level) reduces TFP by 27% in the model without capital, and by 34% in the model with capital and capital adjustment costs.
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Journal Of Economic Groth
The Journal of Economic Growth is a peer-reviewed academic journal covering research in economic growth and dynamic macroeconomics. It was established in 1996 and is published by Springer Science+Business Media. The journal deals with both theories and their empirics, and examines the entire array of subject areas in economic growth, including neoclassical and endogenous growth models, growth and income distribution, human capital, fertility, trade, development, migration, money, the political e