What is the Impact of Increased Business Competition?

December 13, 2019

Preview Citation

Format: Chicago

Sónia Félix, and Chiara Maggi. What is the Impact of Increased Business Competition?, (USA: International Monetary Fund, 2019) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Demand elasticity, Economic theory, Employment, Labor, Labor demand, Labor supply, Production, Productivity

Keywords: Demand elasticity, Employment, Europe, Firms drive, Idiosyncratic productivity, Incumbents firm, Labor demand, Labor supply, Math display, Municipality Count firm, Pre-existing firm, Price level, Productivity, Productivity distribution, WP

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/276
Stock No:

WPIEA2019276
ISBN:

9781513521510
ISSN:

1018-5941

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