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Measuring the Impact of Regulations on FirmsCarmen Pags May 2007Inter-American Development BankResearch DepartmentWhy Measure? Regulations address important information and other market failures, but they may impose large costs in society. Need to get a sense of costs and benefits of regulations Overregulation has been a norm in many countries. Drive to deregulate How much is gained by deregulation? How to measure? Assume we are ultimately interested in jobs, quality of jobs or wages created by a change in business licensing procedures: It is not enough to report the number of firms created, the employment generated or the wages in those firms relative to before the law; WHY? Not necessarily new effects, jobs, investment, etc, some of that already occurred in the informal sector. Need to measure INCREMENTAL EFFECTS. Other changes may have occurred in the same period (economic activity) which we need to account for. Need to construct a COUNTERFACTUALThis presentation Quick overview of methods to measure impact of regulations on firm outcomes. Discussion of benefits and costs of each method and when is best to use each. A hard problem that requires creative solutions Regulations tend to apply to a large territory: exceptions federal or very decentralized states Regulations change infrequently Regulations may change as a response of poor outcomes: For example, as a response to increasing informality, reduced firms profits or lower employment creation Little variation+possible reverse causality problems.Solution #1: Using Cross-Country variation Exploits cross country variation; Djankov et al (2002); Botero et al (2004) Use cross country + time variation; Besley and Burgess (2004); Heckman and Pages (2004); Use cross country + sector variation: Klapper, Laeven, and Rajan (2004); Micco and Pages (2006);Solution #2: Within Country Variation (I) Building measures of regulations at the local/state or firm level, and possibly over time, and relate them to outcomes; This measures tend to be de facto (rather than de jure); It relies in differences in application and implementation of common legal frameworks Examples of such measures: OSS in Indonesia Measures constructed from the World Bank Enterprise Data :Objective indicators and perceptions firm level Solution #2: Within Country Variation (II) Differences in Differences: Assuncao and Monteiro (2007) Exploits a change in legislation in a given country Finds a group that has not been affected by the legislative change and compares change in outcomes before and after the legislative change between a treatment and a control group Variation of this method: use excluded provinces as control group Solution #3: Experimental Design Possibility of evaluation of outcomes embedded in the design of the intervention Treatment groups are randomly selected (for example some localities/or some districts), from the overall population. The non-selected groups are the control Quick overview of pros + cons (I)ApproachProsConsUsed best when:Cross-country (CC) variation; CC+time or CC+ Sectors;It gives info of average effects across a large number of countriesIt requires a measure that varies at the country; country-time, or country-sector level;CC alone is prone to omitted variable bias; Problem reduced when sector, or time dimensions added; Very little within country variation;A general answer is required (rather than country by country bases);Wanting a sense of associations (particularly CC alone) Diff-in-DiffIt can address the country specificityIt requires that part of the population is not-eligible or excluded from treatment;It provides answers only for one country.There is a legal change that can be exploited, jointly with some excluded population Quick overview of pros + cons (II)ApproachProsConsUsed best when:Constructing de facto measures at the local/state/district levelIt can address the country specificity It requires constructing a measure at the local level;It provides answers only for one country;Perception measures may lead to reverse causality issuesA measure at the local level can be constructed;Implementation issues are part of the question of study; Experimental approachIt provides the best measurement It may be expensive to implement; governments are often reluctant to random allocations; it can be easily contaminated with bad implementationThere is interest by part of the government to experiment with new procedures; pilot projects; Conclusion As policymakers, business community and international institutions we need to understand/measure impact of regulations Outcomes may be very distorted, but some reforms may offer little improvement Measurement is not easy but can be addressed by means of different approaches There is not a best approach; different approaches best suited in different situationsReferencesAssuncao, J. and J. Monteiro (2007). “Outgoing the Shadows: Estimating the Impact of bureucracy simplication and tax cut on formality and investment”. Department of Economics, PUC-Rio. Besley, Timothy and Robin Burgess. 2004. “Can Labor Regulation Hinder Economic Performance? Evidence from India.” The Quarterly Journal of Economics 119(1): 91134. Botero, Juan, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2004. “The Regulation of Labor.” Quarterly Journal of Economics 119 (4): 133982. Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andre Shleifer. 2002. “The Regulation of Entry.” Quarterly Journal of Economics, 117 (1): 137. February. Heckman, James, and Carmen Pags. 2004. “Introduction to Law and Employment: Lessons from Latin America and the Caribbean.” In Law and Employment: Lessons from Latin America and the Caribbean eds. J. Heckman and C. Pags. Chicago: National Bureau of Economic Research and University of Chicago Press. Klapper Leora, Luc Laeven, and Raghuram Rajan. 2004. “Business Environment and Firm Entry: Evidence from International Data.” NBER Working Paper No. 10380. National Bureau of Economic Research, Cambridge, Mass. Micco, A, and C. Pags. 2006 “The Economic Effects of Employment Protection: Evidence from International Industry-Level Data” IZA D.P. 2433
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