PRODUCT MARKET REGULATION, FIRM SELECTION, AND UNEMPLOYMENT
This paper analyzes the effect of product market regulation (PMR) on unemployment in a search model with heterogeneous multiple‐worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related...
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| Published in: | Journal of the European Economic Association Vol. 9; no. 2; pp. 278 - 317 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
Malden, USA
Blackwell Publishing Inc
01-04-2011
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| Subjects: | |
| Online Access: | Get full text |
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| Summary: | This paper analyzes the effect of product market regulation (PMR) on unemployment in a search model with heterogeneous multiple‐worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs decrease unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003, Quarterly Journal of Economics, 118, 879–907). Firm heterogeneity magnifies the impact of both types of regulatory costs. We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs. |
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| Bibliography: | istex:E5EF119D8DB6591A179DDA2E3299819D4CC6CA1C ark:/67375/WNG-D2LSPCZH-Q ArticleID:JEEA1011 felbermayr@ifo.de Prat Acknowledgments: We are grateful to Andrea Bassanini for kindly providing us with data and to Florian Baumann, Pierre Cahuc, Hartmut Egger, Marcel Jansen, Marc Melitz, Gianmarco Ottaviano, two anonymous referees, as well as seminar and conference participants at IZA Bonn, the universities of Girona, Konstanz, Vienna, and Tübingen, and the SED meeting 2007 in Prague for comments and discussion. Part of this paper was drafted when Felbermayr was visiting the University of Zürich. Julien Prat acknowledges the support of the University of Vienna, the Barcelona GSE and the Government of Catalonia. Felbermayr julien.prat@iae.csic.es The editor in charge of this paper was Jordi Gali. E‐mail addresses |
| ISSN: | 1542-4766 1542-4774 |
| DOI: | 10.1111/j.1542-4774.2011.01011.x |