Productivity and Entry Regulation in the Service Sector: Evidence from the Universe of Firms in Italy

Abstract

Burdensome entry regulations can hinder productivity growth, particularly in services where competitive pressures are weaker. We construct a novel measure of entry regulation, varying across narrowly defined sectors, and combine it with firm-level data for the universe of Italian firms. Exploiting reforms that generate variation across sectors and over time, we find that deregulation (reductions in red tape) raises productivity. The effect is driven by incumbent firms, with a smaller role for reallocation and selection. Effects are larger in the lower-middle of the productivity distribution and in sectors with higher entry rates and tighter initial regulation.