Center for Global Development
1800 Massachusetts Ave. NW, Third Floor
Ana Maria Oviedo, a Ph.D. Candidate in Economics at the University of Maryland, College Park, will present Doing Business in Developing Economies: The Effect of Regulation and Institutional Quality on the Productivity Distribution.
Please RSVP to Sarah Dean by January 20th at email@example.com
Abstract: This paper offers an explanation for the lack of systematic cross-country variation in the amount of reallocation, in spite of large differences in regulation. It argues that in the presence of uncertain regulation, caused by a poor institutional environment, the “creative destruction” process can lead to high observed reallocation, but low productivity. I modify the Hopenhayn (1992) industry equilibrium model by allowing firms to engage in innovative investment, and by introducing an uncertain innovation cost. Then, I study the entry and exit decision of firms, their innovative behavior, and the subsequent industry evolution. In equilibrium, I find that a more uncertain regulatory environment leads to higher reallocation, but lower average productivity, size, and innovative investments. This indicates that, in addition to the level of regulation, unpredictability of regulation is an important source of inefficiency in the reallocation process.