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The impact of regulation on innovation

Aghion, Philippe, Bergeaud, Antonin and Van Reenen, John ORCID: 0000-0001-9153-2907 (2023) The impact of regulation on innovation. American Economic Review, 113 (11). 2894 - 2936. ISSN 0002-8282

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We present a framework that can be used to assess the equilibrium impact of regulation on endogenous innovation with heterogeneous firms. We implement this model using French firm-level panel data where there is a sharp increase in the burden of labor regulations on companies with 50 or more employees. Consistent with the model’s qualitative predictions, we find a sharp fall in the fraction of innovating firms just to the left of the regulatory threshold. Furthermore, we find a sharp reduction in the positive innovation response of firms to exogenous demand shocks just below the regulatory threshold. Using the structure of our model we quantitatively estimate parameters and find that the regulation reduces aggregate equilibrium innovation (and growth) by 5.7% which translates into a consumption equivalent welfare loss of at least 2.2%, approximately doubling the static losses in the existing literature.

Item Type: Article
Official URL:
Additional Information: © 2023 American Economic Review
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
J - Labor and Demographic Economics > J8 - Labor Standards: National and International > J80 - General
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales
Date Deposited: 12 Sep 2023 15:24
Last Modified: 22 Nov 2023 09:30

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