## _wp06231 - 1. Legal Barriers to Retail Distribution by Region, 1996–2005

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### Introduction and research question
- Investigates why prices in Spain’s regions fail to converge, linking persistent regional price differences to differences in regional barriers to entry for retail distribution.
- Motivating evidence and context:
  - Regulation of product markets or firm entry increases price markups (Blanchard and Giavazzi, 2003).
  - Survey measures of product market competition relate to firm margins (Djankov and others, 2002; Cincera and Galgau, 2005; Neiss, 2001; Cavelaars, 2003).
  - Barriers to entry hinder firm creation and increase average firm size in Europe (Klapper, Laeven, and Rajan, 2006).
  - TDC (Tribunal for the Defense of Competition) finding: regional barriers to entry for large retail establishments have “lowered competition...allowing incumbent firms to be less efficient, which has translated into higher prices” (TDC, 2003, p. 22).
- Spain is suitable for analysis because barriers vary across the 17 autonomous regions (a consequence of the 1978 Spanish Constitution) and contrast with European Single Market deregulation efforts.

### Theoretical framework and testable implication
- Model: Cournot-Nash framework of imperfect competition with long-run prices determined by the zero-profit condition (including barrier-to-entry costs).
- Market structure and assumptions:
  - Two firm types: traditional retailers (never face barriers to entry) and low-cost retailers (face barriers and have a constant marginal-cost advantage ζ).
  - Products are nondifferentiated; firms identical within type; discrete cost advantage for low-cost retailers.
- Key theoretical implication (threshold/coexistence effect):
  - Without barriers, low-cost retailers drive prices down to P = PFE − ζ and exclude traditional retailers.
  - With barriers, prices rise to PFE where traditional retailers can coexist; beyond a coexistence barrier λCO further increases in barriers do not raise prices but drive low-cost outlets out of the market.
  - Comparative statics:
    - Increase in non-barrier fixed costs raises long-run prices.
    - Decline in marginal costs c lowers prices by increasing the number of firms.
    - λCO increases with ζ and with non-barrier-related fixed cost f.
  - Outright bans (barrier 7) in principle fix the number of low-cost outlets (m) but firms may circumvent bans (e.g., by buying incumbents).

### Data and empirical approach
- Unique data set: extensive analysis of competition policies in Spain’s autonomous regions (TDC, 2003).
- Barrier measure: ordinal count of seven barriers to retail trade identified by the TDC (number of barriers in each region and quarter).
- Sample period: 1996–2005.
- Empirical specification guided by the Cournot-Nash model; panel cointegration techniques used (Pedroni, 2001).
- Estimation methods: group mean estimators (MGE) and panel DOLS to accommodate heterogeneous slope coefficients and cointegration.

### Regional barriers to retail competition (TDC’s seven barriers)
- The TDC identified seven distinct barriers to retail competition at the regional level:
  1. defining a large retail firm based on its location;
  2. establishing multiple criteria to determine whether a firm is large;
  3. defining a firm to be large when at least 25 percent is owned by a large firm;
  4. establishing idiosyncratic requirements to license discount stores;
  5. restricting the expansion or a change in a firm’s ownership;
  6. requiring financial viability plans to license commercial establishments;
  7. imposing outright bans on large retail outlets.

### Nature and classification of barriers
- Barriers protect incumbents by imposing a cost on new entrants that incumbents do not or did not incur (McAfee, Mialon, and Williams, 2004, page 462, definition 8).
- This study follows Djankov and others (2002) and counts the number of barriers in individual regions to obtain an ordinal measure; it does not distinguish between “primary” and “ancillary” barriers (McAfee, Mialon, and Williams, 2004, page 483).
- Two most commonly used barriers in Spain: Barrier 1 (location-based definition of large firm) and Barrier 7 (outright bans on large retail outlets).
- Other commonly observed barriers include Barrier 3 (ownership-based large firm definition), Barrier 4 (idiosyncratic license requirements for discount stores), and Barrier 5 (restricting ownership changes).

### Descriptive evidence on prevalence and timing (Spain, 1996–2005)
- Both barrier 1 and barrier 7 have been present in more than half of the regions during the sample period.
- Regions with location-based restrictions (barrier 1) present since the mid-1990s through end-2005: Aragón, Castilla-León, Cataluña, Galicia, La Rioja, Navarra, and Valencia.
- Outright bans (barrier 7) mostly emerged since 2001, with exceptions Baleares and Cataluña.
- Outright bans have typically been used alongside other barriers (exception: Cantabria).
- Castilla-La Mancha is the only region that remained barrier free over the period.
- Most Spanish regions were barrier free in 1996; subsequently 14 of the 17 regions have imposed at least one barrier.
- Regions relatively friendly to retail trade at the outset—Asturias, Cantabria, Extremadura, and País Vasco—have converged toward more restrictive practices.

### Descriptive relationship between barriers and price developments
- National-level cross-section result:
  - An average increase in regional barriers of 1.75 can account for almost four-fifths of the 25 percent increase in the price level since 1996.
  - OLS slope estimate reported: 0.11, which translates into a price increase—log0.11PBarrier∆=×∆—of 19 percent from the increase in barriers.
- Caveat: this overstates the role of barriers because it does not control for overall inflation (macroeconomic effects).
- When controlling for national trends (subtracting time averages), regional time series estimates show heterogeneity:
  - Negative slope coefficients (barriers associated with lower prices) in four regions: Asturias, Cantabria, Madrid, and La Rioja.
  - Statistically indistinguishable (positive) coefficients in four regions: Andalucía, Canarias, Castilla-León, and Cataluña.
- Descriptive conclusion: the price–barrier relation is heterogeneous across regions and necessitates a richer causal framework.

### Empirical estimation results — linear and threshold specifications
- Linear panel estimates:
  - Relation between prices and barriers is tenuous; point estimates for CPI suggest adding barriers increases prices slightly in the long run, if at all.
  - Subcomponent heterogeneity: largest estimated effect (per barrier) in Transportation and Communications and Other: 0.4 percent (per barrier).
  - Sign reversals: subcomponents such as housing, household items, and medicine and health show barriers associated with lower prices.
  - Estimates cointegrate and largely mirror simple correlations.
- Distinct effect of outright bans (Ban binary indicator):
  - Extended linear model separates Ban (binary) from remaining Barriers (k = Barriers − Ban).
  - Theory suggests bans could have larger impact (β3 > β2) because they fix the number of low-cost outlets; empirically the impact of bans and other barriers on prices are indistinguishable (null β2 = β3 cannot be rejected at conventional significance levels).
- Threshold (Cournot-Nash) empirical results:
  - 2β is statistically significant but 3β is not; the estimated threshold is one: prices react to the first barrier but not to additional barriers.
  - 2β—the effect of imposing one or more barriers—increases tenfold in Model 1 compared to the estimated coefficient in the linear model.
  - When 3β is excluded in Model 2 the estimated effect falls but remains larger than in the linear model.
  - With the exception of CPI—reflecting evidence from the medicine and health subcomponent—the perverse (negative) effects of barriers vanish in the panel estimates.

### Key quantitative findings and econometric tests (preserved)
- Sample period: 1996–2005.
- Regions: 17 autonomous regions (Spain).
- Cross-section OLS slope estimate: 0.11 (translates into a 19 percent price increase from the average barrier increase noted).
- Average increase in regional barriers considered in cross-section: 1.75.
- National price increase since 1996 referenced: 25 percent.
- Linear subcomponent largest estimated effect: 0.4 percent (per barrier) in Transportation and Communications and Other.
- Panel MGE example entries:
  - CPI: coefficient 0.074; price effect example reported as −0.4 (percent) in Model 2 context (price effect calculation: (exp(coefficient)−1)×100; example: impact on CPI calculated as (exp(−0.004)−1)×100).
- Unit-root and convergence testing:
  - 136 bilateral unit root tests arise from (17×16)/2 pairs.
  - Panel unit-root tests (Levin, Lin, and Chu; Im, Pesaran, and Shin) indicate neither CPI nor wages converge unconditionally across regions (Table A5).
  - Conditional convergence tests reject lack of conditional price convergence at the 1 percent significance level when conditioning on wages, barriers, or both (Table A6).
  - Pre- and post-barrier comparisons: before regional barriers (pre-late 1980s) more evidence of price convergence; afterwards fewer regions reject unit root (Table A7: 10 of 17 regions reject unit root before barriers were introduced; only Asturias rejects in the more recent period).

### Interpretation, policy implications, and limitations
- Interpretation consistent with model:
  - Imposing barriers raises prices when markets would otherwise be served by low-cost firms alone; once a coexistence equilibrium is reached (threshold λCO), additional barriers primarily expel low-cost firms rather than raise prices further.
  - Empirical threshold estimate suggests a single barrier can send a protectionist signal; additional barriers may change industry composition without further price increases.
- Policy implications:
  - Subnational barriers generate persistent differentiated cost wedges across regions; accounting for barriers restores evidence of price convergence.
  - Imposing a first barrier raises prices; additional barriers may mainly change industry composition (expel low-cost outlets).
  - Regional governments may use barriers to protect traditional shops, employment, or electoral constituencies.
- Limitations:
  - Estimated price effects exclude economy-wide effects by construction (time effects remove common movements).
  - Estimates focus on long-run effects; short-run effects may be larger since barriers’ effectiveness erodes over time as firms circumvent restrictions.
  - Lack of individual-price series prevented direct micro-level assessment.
- Suggested further research directions:
  - Use individual price series to assess barrier effects at the micro level.
  - Analyze the dynamic impact of barriers over time.
  - Extend the Cournot-Nash model to allow exiting firms to relocate and create spillovers to explain puzzling negative barrier effects and regional imitation incentives.

*Source — _wp06231 - 1. Legal Barriers to Retail Distribution by Region, 1996–2005 (extracted from the provided chapter content).*

### 1. Legal Barriers to Retail Distribution by Region, 1996–2005 ..............................................21

### _wp06231 - 1. Legal Barriers to Retail Distribution by Region, 1996–2005 ..............................................21

### Introduction and research question
- Investigates why prices in Spain’s regions fail to converge, linking persistent regional price differences to differences in regional barriers to entry for retail distribution.
- Cites literature: regulation of product markets or firm entry increases price markups (Blanchard and Giavazzi, 2003); empirical evidence from survey measures of product market competition and firm margins (Djankov and others, 2002; Cincera and Galgau, 2005; Neiss, 2001; Cavelaars, 2003).
- Notes recent evidence that barriers to entry hinder firm creation and increase average firm size in Europe (Klapper, Laeven, and Rajan, 2006), suggesting a channel through which barriers affect product markets and prices.
- Highlights Spain’s suitability for study due to dispersion of barriers across autonomous regions (a consequence of the 1978 Spanish Constitution) and a TDC (Tribunal for the Defense of Competition) finding that regional barriers to entry for large retail establishments have “lowered competition...allowing incumbent firms to be less efficient, which has translated into higher prices” (TDC, 2003, p. 22).
- Contrasts regional barriers in Spain with the European Single Market Program initiative to deregulate markets and lower trade barriers.

### Theoretical framework and testable implication
- Uses a Cournot-Nash framework of imperfect competition to model the impact of barriers to entry on the price level.
- Model structure:
  - Two firm types: traditional retailers (never face barriers to entry) and low-cost retailers (face barriers).
  - Long-run price level determined by the zero-profit condition (including barrier-to-entry costs).
- Key implication (threshold effect):
  - In the absence of barriers, low-cost retailers drive prices below traditional retailers’ long-run break-even point, forcing traditional retailers out of the market.
  - With barriers, prices rise to a level where traditional retailers can compete with low-cost retailers.
  - Further increases in barriers beyond this threshold leave the price level unchanged because prices are pinned down by traditional retailers; low-cost retailers are excluded from the market.
- Model assumes nondifferentiated products and a discrete cost advantage for low-cost retailers.

### Data and empirical approach
- Empirical evidence exploits a unique data set derived from an extensive analysis of competition policies in Spain’s autonomous regions (TDC, 2003).
- Constructs an ordinal measure of barriers to entry from seven barriers to retail trade identified by the TDC.
- Empirical specification is guided by the Cournot-Nash model.
- Uses panel cointegration techniques to estimate the price effect of barriers (Pedroni, 2001).

### Regional barriers to retail competition (as identified by the TDC)
- The TDC identified seven distinct barriers to retail competition at the regional level:
  1. defining a large retail firm based on its location;
  2. establishing multiple criteria to determine whether a firm is large;
  3. defining a firm to be large when at least 25 percent is owned by a large firm;
  4. establishing idiosyncratic requirements to license discount stores;
  5. restricting the expansion or a change in a firm’s ownership;
  6. requiring financial viability plans to license commercial establishments;

### Institutional and legal context
- Notes Spanish courts have upheld the view that a regional government’s autonomy is limited only by those restrictions spelled out in the Constitution; comparison drawn to the U.S. Supreme Court’s interpretation of the 10th amendment.

*Italic: Source — _wp06231 - 1. Legal Barriers to Retail Distribution by Region, 1996–2005 (extracted from the provided chapter content).*

### 7. imposing outright bans on large retail outlets.

### 7. imposing outright bans on large retail outlets.

### Nature and classification of barriers to entry
- Barriers protect incumbent retail establishments by increasing the cost of operating in a particular region or extending costs to a broader range of firms; they entail “a cost that must be incurred by a new entrant and that incumbents do not or have not had to incur” (McAfee, Mialon, and Williams, 2004, page 462, definition 8).
- This study follows Djankov and others (2002) and counts the number of barriers in individual regions to obtain an ordinal measure of barriers to entry; it does not distinguish between “primary barrier to entry” and “ancillary barrier to entry” (McAfee, Mialon, and Williams, 2004, page 483, definitions 10 and 11).
- Two most commonly used barriers in Spain:
  - Barrier 1: defining a large firm based on its location.
  - Barrier 7: outright bans on large retail outlets.
- Other specific barriers noted:
  - Barrier 3: defining large firms based on ownership.
  - Barrier 4: idiosyncratic license requirements for discount stores.
  - Barrier 5: restricting ownership changes.

### Descriptive evidence on prevalence and timing (Spain, 1996–2005)
- Sample period: 1996–2005.
- Both barrier 1 and barrier 7 have been present in more than half of the regions during the sample period (Table 1).
- Regions with location-based restrictions (barrier 1) in place since mid-1990s and remaining through end-2005: Aragón, Castilla-León, Cataluña, Galicia, La Rioja, Navarra, and Valencia (Figure 1).
- Outright bans (barrier 7) mostly emerged since 2001, with exceptions Baleares and Cataluña.
- Outright bans have typically been used in tandem with other barriers (exception: Cantabria).
- Castilla-La Mancha is the only region that remained barrier free over the period.
- Most Spanish regions were barrier free in 1996; subsequently 14 of the 17 regions have imposed at least one barrier (Figure 2, top panel).
- Regions that were relatively friendly to retail trade at the outset—Asturias, Cantabria, Extremadura, and País Vasco—have converged toward more restrictive practices.

### Relationship between barriers and price developments (descriptive)
- National-level association: a cross-section regression suggests that an average increase in regional barriers to retail competition of 1.75 can account for almost four-fifths of the 25 percent increase in the price level since 1996.
  - Ordinary least squares (OLS) slope estimate reported: 0.11, which translates into a price increase—log0.11PBarrier∆=×∆—of 19 percent from the increase in barriers.
- Caveat: this assessment overstates the role of barriers because it does not control for overall inflation (macroeconomic effects).
- When prices and barriers are expressed as deviations from national trends (subtracting time averages) to control for economy-wide effects, regional time series estimates reveal heterogeneity:
  - Negative slope coefficients (barriers associated with lower prices) found in four regions: Asturias, Cantabria, Madrid, and La Rioja.
  - Statistically indistinguishable (positive) coefficients found in four regions: Andalucía, Canarias, Castilla-León, and Cataluña.
- Conclusion from descriptive analysis: the price-barrier relation is heterogeneous across regions and requires a richer framework for causal assessment.

### Theoretical framework — Cournot-Nash model with barriers to entry
- Market structure:
  - Two firm types in each region: traditional retail shops (never face barriers) and low-cost outlets (face barriers but have a cost advantage).
  - Firms are identical within type; they choose output in a Cournot-Nash setting; long-run prices pinned down by the zero-profit condition.
- Key theoretical insights:
  - Barriers act like increases in fixed costs and raise long-run prices because exits reduce the number of firms more than the per-firm output increase offsets.
  - Threshold (coexistence) effect: as barriers increase, prices rise until they reach the free-entry price of traditional retailers, PFE. At that barrier level (λCO) traditional retailers and low-cost outlets coexist (P = PFE). Further increases in barriers above λCO do not increase prices but drive low-cost outlets out of the market.
  - In absence of barriers, low-cost outlets drive prices down to P = PFE − ζ (ζ is the low-cost outlets’ constant marginal-cost advantage) and traditional shops are excluded.
  - Outright bans (barrier 7) in principle fix the number of low-cost outlets (m) and thus can pin down coexistence numbers; in practice, low-cost firms may circumvent bans by buying incumbents.
- Comparative statics highlighted:
  - Increase in non-barrier fixed costs raises long-run prices.
  - Decline in marginal costs c lowers prices by increasing the number of firms.
  - The coexistence barrier λCO increases with the cost advantage ζ and with non-barrier-related fixed cost f.

### Empirical strategy and evidence
- Empirical approach:
  - Panel estimation using group mean estimators and panel DOLS following Pedroni (2001) to accommodate heterogeneous slope coefficients across regions and cointegration.
  - Dependent variable: regional consumer price index (CPI) and eight CPI subcomponents (time averages subtracted to avoid nuisance parameters).
  - Main explanatory variable: ordinal measure Barriers (number of barriers in each region and quarter).
- Linear specification results:
  - Relation between prices and barriers is tenuous.
  - Point estimates for CPI suggest that adding barriers increases prices slightly in the long run, if at all.
  - Subcomponent heterogeneity: largest estimated effect (per barrier) uncovered in Transportation and Communications and Other: 0.4 percent (per barrier).
  - Sign reversals: several subcomponents—housing, household items, and medicine and health—show barriers associated with lower prices.
  - Estimates cointegrate and largely mirror earlier simple correlations.
- Distinct effect of outright bans (barrier 7):
  - Extended linear model separates Ban (binary indicator for bans) from remaining Barriers (k = Barriers − Ban).
  - Theory suggests bans could have larger impact on prices (β3 > β2) because they fix the number of low-cost outlets; empirically the impact of bans and other barriers on prices are indistinguishable.
  - Null hypothesis β2 = β3 cannot be rejected at conventional significance levels (p-value exceeds conventional thresholds).

### Key analytical conclusions
- Barriers to entry in regional retail markets in Spain increased substantially between 1996 and 2005, with 14 of 17 regions imposing at least one barrier by end of sample.
- Theoretical model predicts a threshold effect: barriers raise prices up to a coexistence barrier λCO (P reaches PFE), beyond which prices do not rise further though low-cost outlets exit.
- Empirical evidence is heterogeneous across regions and price subcomponents; simple linear models capture small average effects but mask important regional heterogeneity and subcomponent-specific responses.
- Outright bans (barrier 7) do not exhibit statistically distinguishable effects on prices relative to other barriers in the empirical specifications used, possibly because low-cost firms can circumvent bans (e.g., by buying incumbents).

*Source: _wp06231 - 7. imposing outright bans on large retail outlets.*

### 0.10 in all regressions. A puzzling result emerges, however, as a perverse effect of bans is

### _wp06231 - 0.10 in all regressions. A puzzling result emerges, however, as a perverse effect of bans is

### Empirical findings on barriers and prices
- Linear panel estimates point to puzzling or perverse effects of barriers to entry on prices; in a number of price subcomponents, estimated coefficients imply prices fall when bans are imposed.
- Panel (MGE) estimates show statistically significant effects of barriers on prices but the magnitudes are small.
- Threshold (Cournot-Nash) empirical results:
  - 2β is statistically significant but 3β is not; the estimated threshold is one: prices react to the first barrier but not to additional barriers.
  - 2β—the effect of imposing one or more barriers—increases tenfold in Model 1 compared to the estimated coefficient in the linear model.
  - When 3β is excluded in Model 2 the estimated effect falls but remains larger than in the linear model.
  - With the exception of CPI—reflecting evidence from the medicine and health subcomponent—the perverse effects of barriers vanish in the panel estimates.
- Heterogeneity and variation:
  - Substantial variation in price effects across regions and subcomponents: large positive and negative effects were found across all price subcomponents (Figure 4 shows effects by region in percent).
  - Panel estimates constrain economy-wide effects because time dummies “soak up indiscriminately the economy-wide price effects of barriers.”

### Theoretical framework and interpretation
- A Cournot-Nash model of imperfect competition (traditional shops and low-cost outlets) implies a threshold effect of barriers on prices:
  - Imposing barriers on low-cost establishments raises prices as long as the market is supplied by low-cost firms alone.
  - If barriers exceed the threshold level such that a coexistence equilibrium obtains (both low-cost and traditional firms supply), prices will not rise further because traditional shops—free to enter—pin down prices at the zero-profit level; low-cost outlets would exit.
- Interpreting the empirical threshold:
  - The data suggest a threshold value of one: imposing a second or third barrier does not increase prices further.
  - This is consistent with a signaling/protection effect: a single barrier sends a protectionist message; additional barriers may expel low-cost outlets without further raising prices and thus alter industry composition in favor of traditional shops.

### Key quantitative results and statistics (preserved as in source)
- Threshold estimation details:
  - Threshold values were restricted to positive integer values 1 and 2.
  - The condition governing the highest significant indicator variable determines the estimated threshold: if 2,jβ significant but higher βh(h≥2) are not, threshold = one.
- Panel MGE (Table 4) selected entries (coefficients and price effects shown or described in source):
  - CPI: coefficient 0.074, price effect example reported as -0.4 (percent) in Model 2 context (Table 4 indicates price effect calculation: exp(coefficient)−1 times 100; example: impact on CPI calculated as (exp(−0.004)−1) times 100).
  - Entertainment and Other show larger positive panel price effects in Model 1 and Model 2 (Table 4 flags these with § where I(Barriers ≥ 2) was excluded in Model 2 although statistically significant in Model 1).
- Unit-root and convergence testing (Appendix):
  - Spain has 17 autonomous regions; 136 bilateral unit root tests arise from (17×16)/2 pairs.
  - Panel unit-root tests (Levin, Lin, and Chu; Im, Pesaran, and Shin) indicate neither CPI nor wages converge unconditionally across regions (Table A5).
  - Conditional convergence tests reject lack of conditional price convergence at the 1 percent significance level when conditioning on wages, barriers, or both (Table A6).
  - Pre- and post-barrier introduction comparisons: before regional barriers (pre-late 1980s) more evidence of price convergence; afterwards, fewer regions reject unit root (Table A7: 10 of 17 regions reject unit root before barriers were introduced; only Asturias rejects in the more recent period).

### Policy implications and suggested research directions
- Policy implications:
  - Subnational barriers to retail competition generate a persistent differentiated cost wedge across regions; accounting for barriers restores evidence of price convergence.
  - Imposing a first barrier raises prices; imposing further barriers may principally change industry composition (expel low-cost outlets) rather than raise prices further.
  - Regional governments may use barriers to protect traditional, locally owned shops and employment or to strengthen electoral constituencies—consistent with observed firm-size increases elsewhere.
- Limitations of current estimates:
  - Estimated price effects exclude economy-wide effects by construction (time effects remove common movements).
  - Estimates focus on long-run effects; short-run effects may be larger since barriers’ effectiveness erodes over time as firms circumvent restrictions.
  - Lack of individual-price series prevented direct assessment at the micro price level.
- Suggested further research:
  - Use individual prices series to assess barrier effects at the micro level.
  - Delve into the dynamic impact of barriers over time.
  - Extend the Cournot-Nash model to allow exiting firms to relocate and create spillovers—this could explain puzzling negative effects of barriers and capture imitation incentives among regional governments.

*Source: _wp06231 (excerpts provided from the IMF working paper PDF).*

### References

### _wp06231 - References

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- Froot, K. A., and K. Rogoff, 1995, “Perspectives on PPP and Long-Run Real Exchange Rates,” in Gross and Rogoff, eds., Handbook of International Economics, Vol. 3 (Amsterdam: North Holland).
- Froot, K., M. Kim, and K. Rogoff, 1995, “The Law of One Price Over 700 Years,” Working Paper No. 5132 (Cambridge, Massachusetts: National Bureau of Economic Research).
- O’Connell, P., and S. Wei, 2002, “‘The Bigger They Are, the Harder They Fall’: Retail Price Differences Across U.S. Cities,” Journal of International Economics, Vol. 56 (January), pp. 21–53.
- Parsley, D., and S. Wei, 1996, “Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations,” Quarterly Journal of Economics, Vol. 111 (No. 4), pp. 1211–36.
- Rogers, J., 2001, “Price Level Convergence, Relative Prices, and Inflation in Europe,” International Finance Discussion Papers No. 699 (Washington: Board of Governors, Federal Reserve).
- Rogoff, Kenneth, 2003, “Globalization and Global Disinflation,” Federal Reserve Bank of Kansas City, Economic Review, Vol. 88 (No. 4), pp. 45–79.
- European Central Bank, 2006, “Competition, Productivity, and Prices in the Euro Area Services Sector,” Occasional Paper Series No. 44 (Frankfurt).

### Econometric methods, panel data, unit roots, and cointegration
- Andrews, D.W.K., and W. Ploberger, 1994, “Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative,” Econometrica, Vol. 62 (November), pp. 1384–1414.
- Hansen, B., 1996, “Inference When a Nuisance Parameter Is Not Identified Under the Null Hypothesis,” Econometrica, Vol. 64 (March), pp. 413–30.
- Hansen, B., 1999, “Threshold Effects in Non-dynamic Panels: Estimation, Testing, and Inference,” Journal of Econometrics, Vol. 93 (November), pp. 345–68.
- Im, K.S., M.H. Pesaran, and Y. Shin, 2003, “Testing for Unit Roots in Heterogeneous Panels,” Journal of Econometrics, Vol. 115 (July), pp. 53–74.
- Levin, A., C. Lin, and C.J. Chu, 2002, “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties,” Journal of Econometrics, Vol. 108 (May), pp. 1–24.
- Maddala, G.S., and S. Wu, 1999, “A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test,” Oxford Bulletin of Economics and Statistics, Vol. 61 (Special Issue, November), pp. 631–52.
- Pedroni, P., 1999, “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,” Oxford Bulletin of Economics and Statistics (Special Issue), pp. 653–70.
- Pedroni, P., 2000, “Fully Modified OLS for Heterogeneous Cointegrated Panels,” in Nonstationary Panels, Panel Cointegration and Dynamic Panels, Vol. 15, Advances in Econometrics, ed. by B. Balcagi (Amsterdam: JAI), pp. 93–115.
- Pedroni, P., 2001, “Purchasing Power Parity Tests in Cointegrated Panels,” Review of Economics and Statistics, Vol. 83 (No. 4), pp. 727–31.
- Pedroni, P., and J. Y. Yao, 2005, “Regional Income Divergence in China” (mimeo; Houston: Rice University).
- Pesaran, M.H., 2006, “Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,” Econometrica, forthcoming.
- Pesaran, M.H., and R. Smith, 1995, “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels,” Journal of Econometrics, Vol. 68 (July), pp. 79–113.
- Stock, J., and M. Watson, 1993, “A Simple Estimator of Cointegrating Vectors in Higher-Order Integrated Systems,” Econometrica, Vol. 61 (July), pp. 783–820.
- Evans, Paul, 1998, “Using Panel Data to Evaluate Growth Theories,” International Economic Review, Vol. 39 (No. 2), pp. 295–306.

### Other theoretical and sectoral contributions
- Mas-Colell, A., M. Whinston, and J. Green, 1995, “Market Power,” Chapter 12 in Microeconomic Theory (New York: Oxford University Press), pp. 383–435.
- Neiss, K. S. (2001), “The Mark-Up and Inflation: Evidence in OECD Countries,” Canadian Journal of Economics, Vol. 34 (No. 2), pp. 570–87.
- Klapper, Leora, Luc Laevan, and Reghuram Rajan, 2006, “Entry Regulation as a Barrier to Entrepreneurship” (mimeo; Washington: World Bank). 

*Reference list from _wp06231 - References*

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