Big question in this lecture
Stockholm Doctoral Course Program in Economics
Development Economics II
Lecture 4 (2nd half)
Regulations
Masayuki Kudamatsu
IIES, Stockholm University
23 November, 2011
Big question in this lecture
What is the impact
of regulations on
development?
• Shifts in intellectual paradigm from
state intervention to free market
• But no convincing evidence
Methodology focus in this lecture
How to identify the impact of policies
where randomization is infeasible
• Limitations of cross-country
regression
• Subnational panel data as
alternative
Outline
Entry Regulations
Labor Regulations
Interactions of Entry and Labor
Regulations
1. Entry Regulations
• Djankov, La Porta, Lopez de
Silanes, and Shleifer (2002, QJE)
• Precursor to World Bank’s Doing
Business annual survey
1-1 Research questions
• What the regulation of entry across
countries is like?
• Do governments regulate entry for
correcting market failure (public
interest theory) or for enriching
politicians and bureaucrats (public
choice theory)?
1-2 Measuring entry regulations
# of procedures (interactions with
outside entities) required by law to set
up a standardized firm:
• industrial or commercial activities
• in largest city
• no foreign trade
• renting land
• etc.
1-2 Measuring entry regulations:
descriptive stats
Type of
Mean # of
regulations
procedures
all
10.48
safety & health
0.34
environment
0.14
taxes
2.04
labor & social security
1.94
“screening”
6.04
(from Table III, Panel A)
From Djankov et al. (2002), p. 11
1-2 Measuring entry regulations:
descriptive stats (cont.)
• Fewer procedures in richer
countries (Table III, Panel B)
Quartile of
Mean # of
GDP per capita procedures
1st
6.77
2nd
11.10
3rd
12.33
4th
11.90
1-3 Estimating Impacts
By using cross-country data, estimate
yc = α + βRc + γ log(
GDPc
) + εc
POPc
• Rc : # of procedures
• GDP: proxy for good governance &
need for correcting market failure
1-3 Results (Tables IV and V)
More entry regulations
• associated w/:
• Less compliance w/ international
quality standards
• More deaths from intenstinal
infections
• Larger unofficial economy
• More corruption
• not associated w/
• water pollution
• death from accidental poisoning
• product market competition
1-3 Interpretations
Public choice theory vindicated? No,
because
• Benevolent govt: regulate entry
when market failure severe
⇒ Could still end up with worse
outcomes if market failure so severe
• Corruption and red-tape can be
necessary for enhancing welfare
(Acemoglu and Verdier 2000;
Banerjee 1997)
1-4 Estimating causes
By using cross-country data, estimate
Rc = α + βXc + γ log(
GDPc
) + εc
POPc
• Xc : measure of how benevolent
govt is
• GDP: proxy for severity of market
failure
⇐ Xc correlates with GDP
1-4 Results (Tables VII)
More entry regulations associated w/:
• Less constrained executive
• Less effective legislature
• More autocratic political institutions
• French legal origin
cf. La Porta, Lopez de Silanes, Shleifer
(2008, JEL)
1-4 Interpretations
Public choice theory vindicated? No,
because
• Democracy and regulations:
simultaneously determined by, say,
history
• More democratic governments: not
necessarily better reflect preference
of the public
cf. Lecture 5 next week
1-5 Taking stock
• Regulations (and other policies):
endogenous
⇒ Cross-sectional regression results:
hard to be conclusive
cf. Rodrik (2005)
• Correlates of entry regulations:
corruption, unofficial economy,
democracy
⇒ Inspiration for theory
cf. Acemoglu (2008)
2. Labor Regulations
• Besley and Burgess (2004, QJE)
• Use subnational panel data to
estimate the impact of regulations
2-1 Research question
Is labor regulation really bad for
manufacturing growth?
• Manufacturing: driver of economic
growth
• Labor regulation often blamed for
bad economic performance (India,
Europe)
2-2 India as a testing ground
• 1947: labor regulations legislated at
federal level
• Since then, each state
independently amends them in
either pro-worker (+1) or
pro-employer (-1) directions
⇒ Comparable measures of labor
regulations across states
Besley & Burgess (2004, Figure 2)
2-2 India as a testing ground
(cont.)
• Other industrial policies are
implemented at the federal level
⇒ State-level labor regulations won’t
proxy for other policies
• Labor regulations apply to
registered manufacturing sectors
(firms w/ many employees) only
⇒ Other sectors can be used for
placebo tests
2-3 Empirical strategy
Using state panel (1958-92) data
yst = αs + βt + µrs,t−1 + x�stξ + εst
• rs,t−1 : degree of labor regulations
• αs : state fixed effect
• βt : year fixed effect
• xst : time-varying exogenous
covariates
• Standard errors: clustered at state
level (how many clusters?)
Digression: s.e. clustering
• Always report # of clusters used for
s.e. calculation
⇐ If small (
Development Economics II
Lecture 4 (2nd half)
Regulations
Masayuki Kudamatsu
IIES, Stockholm University
23 November, 2011
Big question in this lecture
What is the impact
of regulations on
development?
• Shifts in intellectual paradigm from
state intervention to free market
• But no convincing evidence
Methodology focus in this lecture
How to identify the impact of policies
where randomization is infeasible
• Limitations of cross-country
regression
• Subnational panel data as
alternative
Outline
Entry Regulations
Labor Regulations
Interactions of Entry and Labor
Regulations
1. Entry Regulations
• Djankov, La Porta, Lopez de
Silanes, and Shleifer (2002, QJE)
• Precursor to World Bank’s Doing
Business annual survey
1-1 Research questions
• What the regulation of entry across
countries is like?
• Do governments regulate entry for
correcting market failure (public
interest theory) or for enriching
politicians and bureaucrats (public
choice theory)?
1-2 Measuring entry regulations
# of procedures (interactions with
outside entities) required by law to set
up a standardized firm:
• industrial or commercial activities
• in largest city
• no foreign trade
• renting land
• etc.
1-2 Measuring entry regulations:
descriptive stats
Type of
Mean # of
regulations
procedures
all
10.48
safety & health
0.34
environment
0.14
taxes
2.04
labor & social security
1.94
“screening”
6.04
(from Table III, Panel A)
From Djankov et al. (2002), p. 11
1-2 Measuring entry regulations:
descriptive stats (cont.)
• Fewer procedures in richer
countries (Table III, Panel B)
Quartile of
Mean # of
GDP per capita procedures
1st
6.77
2nd
11.10
3rd
12.33
4th
11.90
1-3 Estimating Impacts
By using cross-country data, estimate
yc = α + βRc + γ log(
GDPc
) + εc
POPc
• Rc : # of procedures
• GDP: proxy for good governance &
need for correcting market failure
1-3 Results (Tables IV and V)
More entry regulations
• associated w/:
• Less compliance w/ international
quality standards
• More deaths from intenstinal
infections
• Larger unofficial economy
• More corruption
• not associated w/
• water pollution
• death from accidental poisoning
• product market competition
1-3 Interpretations
Public choice theory vindicated? No,
because
• Benevolent govt: regulate entry
when market failure severe
⇒ Could still end up with worse
outcomes if market failure so severe
• Corruption and red-tape can be
necessary for enhancing welfare
(Acemoglu and Verdier 2000;
Banerjee 1997)
1-4 Estimating causes
By using cross-country data, estimate
Rc = α + βXc + γ log(
GDPc
) + εc
POPc
• Xc : measure of how benevolent
govt is
• GDP: proxy for severity of market
failure
⇐ Xc correlates with GDP
1-4 Results (Tables VII)
More entry regulations associated w/:
• Less constrained executive
• Less effective legislature
• More autocratic political institutions
• French legal origin
cf. La Porta, Lopez de Silanes, Shleifer
(2008, JEL)
1-4 Interpretations
Public choice theory vindicated? No,
because
• Democracy and regulations:
simultaneously determined by, say,
history
• More democratic governments: not
necessarily better reflect preference
of the public
cf. Lecture 5 next week
1-5 Taking stock
• Regulations (and other policies):
endogenous
⇒ Cross-sectional regression results:
hard to be conclusive
cf. Rodrik (2005)
• Correlates of entry regulations:
corruption, unofficial economy,
democracy
⇒ Inspiration for theory
cf. Acemoglu (2008)
2. Labor Regulations
• Besley and Burgess (2004, QJE)
• Use subnational panel data to
estimate the impact of regulations
2-1 Research question
Is labor regulation really bad for
manufacturing growth?
• Manufacturing: driver of economic
growth
• Labor regulation often blamed for
bad economic performance (India,
Europe)
2-2 India as a testing ground
• 1947: labor regulations legislated at
federal level
• Since then, each state
independently amends them in
either pro-worker (+1) or
pro-employer (-1) directions
⇒ Comparable measures of labor
regulations across states
Besley & Burgess (2004, Figure 2)
2-2 India as a testing ground
(cont.)
• Other industrial policies are
implemented at the federal level
⇒ State-level labor regulations won’t
proxy for other policies
• Labor regulations apply to
registered manufacturing sectors
(firms w/ many employees) only
⇒ Other sectors can be used for
placebo tests
2-3 Empirical strategy
Using state panel (1958-92) data
yst = αs + βt + µrs,t−1 + x�stξ + εst
• rs,t−1 : degree of labor regulations
• αs : state fixed effect
• βt : year fixed effect
• xst : time-varying exogenous
covariates
• Standard errors: clustered at state
level (how many clusters?)
Digression: s.e. clustering
• Always report # of clusters used for
s.e. calculation
⇐ If small (