## What is the Impact of Increased Business Competition?

_IMF Working Papers, December 13, 2019_

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## Bibliographic details
- Authors: Sónia Félix, Chiara Maggi
- Published: December 13, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513521510.001

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### Summary of research question and approach
- Research objective: Study the macroeconomic effect and underlying firm-level transmission channels of a reduction in business entry costs.
- Empirical strategy: Use a natural experiment — a reform in Portugal that reduced entry time and costs — exploiting the staggered implementation of the policy across Portuguese municipalities.
- Data focus: Firms' entry, exit, and employment decisions.

### Key empirical findings
- Entry and employment effects:
  - The reform increased local entry by 25% per year in its first four years of implementation.
  - The reform increased local employment by 4.8% per year in its first four years of implementation.
- Source of employment gains:
  - Around 60% of the increase in employment came from incumbent firms expanding their size.
  - Most of the incumbent expansion occurred among the most productive firms.
- Heterogeneity:
  - The response across incumbent firms was heterogeneous, with the most productive firms driving the bulk of expansion.

### Theoretical implications and modeling results
- Standard models:
  - Standard models of firm dynamics that assume a constant elasticity of substitution are inconsistent with the observed expansionary and heterogeneous response across incumbent firms.
- Alternative model:
  - A model with heterogeneous firms and variable markups can account for the facts: the most productive firms face a lower demand elasticity and expand their employment in response to increased entry.

### Subjects and keywords (as listed)
- Subjects: 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

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_Source: https://www.imf.org/en/publications/wp/issues/2019/12/13/what-is-the-impact-of-increased-business-competition-48852_