Want Higher Productivity? Reduce Entry Costs

Want higher productivity? Reduce entry costs. This is the main finding in a new paper by Levon Barseghyan (Cornell) and Ricardo DeCecio (the Fedreal Reserve). Using the regulation of entry data from Djankov et al (2002), they find that the productivity of countries with entry costs in the lowest decile is 3.43 times higher than that in countries in the highest decile.

What is the mechanism for this difference? The authors find that, "The mechanism through which entry costs influence productivity is that countries with high entry barriers have lower business density and higher variance of employment distribution across firms."

This is an exciting result as the link between regulation and productivity is under-researched. So is the link between regulation and economic growth. But as growth is affected by so many things, studying the possible channels through which the ease of doing business results in higher growth is the way to go. Barseghyan and DeCecio provide evidence for one such channel: from entry costs to entrepreneurship to lower productivity and hence retarded growth.

This result is always of interest, but particularly now when politicians around the world are looking for ways to stop the decline in income caused by the unfolding crisis.