NBER WORKING PAPER SERIES
REGULATION AND INVESTMENT
Alberto Alesina
Silvia Ardagna
Giuseppe Nicoletti
Fabio Schiantarelli
Working Paper 9560
http://www.nber.org/papers/w9560
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
March 2003
We would like to thank Frank Gollop and participants at seminars at Boston College, Brandeis and IGIER
Bocconi for useful comments. Alesina is grateful for financial support to the NSF for a grant through the
NBER. The views expressed in the paper are those of the authors and do not necessarily represent those of
the institutions to which they are affiliated or the National Bureau of Economic Research.
©2003 by Alberto Alesina, Silvia Ardagna, Giuseppe Nicoletti, and Fabio Schiantarelli. All rights
reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission
provided that full credit including ©notice, is given to the source.
Regulation and Investment
Alberto Alesina, Silvia Ardagna, Giuseppe Nicoletti, and Fabio Schiantarelli
NBER Working Paper No. 9560
March 2003
JEL No. A1
ABSTRACT
One commonly held view about the difference between continental European countries and other
OECD economies, especially the United States, is that the heavy regulation of Europe reduces its
growth. Using newly assembled data on regulation in several sectors of many OECD countries, we
provide substantial and robust evidence that various measures of regulation in the product market,
concerning in particular entry barriers, are negatively related to investment. The implications of our
analysis are clear: regulatory reforms, especially those that liberalize entry, are very likely to spur
investment.
Alberto Alesina Silvia Ardagna
Department of Economics Wellesley College
Harvard University
Cambridge, MA 02138
and NBER
aalesina@harvard.edu
Giuseppe Nicoletti Fabio Schiantarelli
OECD Boston College
Re gulation and Investment
Alberto Alesina, Silvia Ardagna, Giuseppe Nicoletti, and Fabio Schiantarelli
∗
(Harv ard University, Wellesle y College, OECD, and Boston College)
December 2002
Re vised February 2003
Abstract
One commonly held view about the difference between continental Eu-
ropean countries and other OECD economies, especially the United States,
is that the heavy regulation of Europe reduces its growth. Using newly as-
sembled data on regulation in several sectors of many OECD countries, we
provide substantial and robust evidence that various measures of regulation
in the product market, concerning in particular entry barriers, are negatively
related to investment. The implications of our analysis are clear: regulatory
reforms, especially those that liberalize entry, are very likely to spur invest-
ment.
1 Intr o duction
In the past decade the rate of GDP growth has been remarkably different amongst
OECD countries. One of the most striking and often cited comparison is the one
between the US with a 4.3 percent average GDP growth in the second half of the
nineties and large continental European economies (Germany, Italy and France)
with 2 percent average growth. One commonly held explanation of these differ-
ences is that a stricter regulation of markets has pre vented faster growth in many
European countries especially in a period, the nineties, of rapid technological in-
novation. Is this true? This paper suggests that the answer is “yes”: various mea-
sures of product market regulation are negatively related to investment, which is,
of course, an important engine of growth.
∗
We would like to thank Frank Gollop and participants at seminars at Boston College, Brandeis
and IGIER Bocconi for useful comments. Alesina is grateful for Þnancial support to the NSF for
a grant through the NBER. The views expressed in the paper are those of the authors and do not
necessarily represent those of the institutions to which they are afÞliated.
1
In the last decade or so, most OECD countries have experienced some form of
regulatory reforms (deregulation for short) implying entry liberalization and pri-
vatization. However, the timing, extent, nature, and starting point varies across
countries. For instance, the United States started deregulating earlier, already in
the seventies. In 1977, 17 per cent of the US GNP was produced by fully regulated
industries, and by 1988 this total had been cut to 6.6 percent of GNP.
1
Other early
and decisive reformers have been New Zealand and Britain, while laggards have
been Italy and France.
We rely on these diverse histories to study the effects of regulatory reforms
in sectors which were traditionally most heavily sheltered from competition and
have witnessed, at different times and to different degrees, some form of dereg-
ulation and privatization in various countries. SpeciÞcally, we look at the ef fe cts
of regulation on investment in the transport (airlines, road freight and railways),
communication (telecommunications and postal) and utilities (electricity and gas)
sectors. We measure regulation with different time varying indicators that capture
entry barriers and the extent of public ownership, among other things.
We Þnd that regulatory reforms have had a signiÞcant positive impact on capital
accumulation in the transport, communication, and utilities industries. In particu-
lar, liberalization of entry in potentially competitive markets seems to have had
the largest and most signiÞcant impact on private investment.
2
The effect of pri-
vatization is less clear-cut. On the one hand privatization may lead to more proÞt
opportunities for private Þrms; on the other hand public enterprises may overinvest
if they pursue political objectives and/or if managers are not constrained by the dis-
cipline imposed by capital markets. There is also evidence that the marginal effect
of deregulation on investment is greater when the policy reform is large and when
changes occur starting from already low er levels of regulation. In other words,
small changes in a heavy regulated environment are not likely to produce much of
an effect.
Much of the literature on the effects of regulation in OECD countries is con-
cerned with the labor market, see for instance, Blanchard and Wolfers (2000).
Work on the macroeconomic effects of goods market is more limited.
3
Blanchard
and Giavazzi (2001) develop an insightful model of both labor market and product
1
See Winston (1993). The Þgures are from the January 1991 Survey of Current Business.
2
Our conclusion that less intrusive government intervention favors private investment is consistent
with the Þnding by Alesina et al. (2002). They show in a panel of OECD countrie s that a reduction of
the size of government measured by total spending over GDP and total taxation increases the private
accumulation of capital. Results by Blanchard and Perotti (2002) speciÞcallyontheUSareonthe
same line.
3
There is of course a vast literature on the microeconomics of regulation and deregulation. See
for instance the survey by Joskow and Rose (1989) and Winston (1993).
2
market regulation and their interconnection. Nicoletti et al. (2001a, b) provide
empirical evidence in favor of a negative effect of anti-competitiv e product market
regulation on employment in a panel of OECD countries. Moreover, Nicoletti and
Scarpetta (2002) Þnd that product market regulation lowers multifactor productiv-
ity growth in O ECD countries, while Bassanini and Ernst (2002) Þnd a negative
effect of regulation on R&D. Finally, Djankov, La Porta, Lopez de Silanes, and
Shleifer (2002) focus on regulations that affect how easy it is to start a business in
85 countries. Their paper contrasts developing countries with developed ones and
lends support to the view of excessive regul ation as a hindrance to entrepreneur-
ship.
4
To our knowledge, there are no contributions in the literature that use broad
time varying measures of product market regulation and look at the relationship
between regulatory reforms and investment in a panel context.
The paper is organized as follows. Section 2 presents a simple model to il-
lustrate the channels through which regulation can affect capital accumulation.
Section 3 describes our data and, in particular , the measurement of the regulatory
environment. Section 4 discusses our results in sectors (utilities, telecommunica-
tion, transport) which were heavily regulated and have experienced various forms
of deregulation. The last section concludes.
2 Product Market Regulation and Investment: Some The-
ory
Product market regulation can inßuence investment in several ways. First, as Blan-
chard and Giavazzi (2001) emphasize in a non-competitive model of employment
determination, changes in regulation affect the markup of prices over marginal
costs, because of their impact, for instance, on entry barriers and, hence, on the
number of Þrms. Second, regulation can inßuence the costs that even existing
Þrms face when expanding their productive capacity. For example, red tape and
other forms of regulatory burdens can increase Þrms’ costs of adjusting the capital
stock and hamper their capacity to react to changes in fundamentals. Third, for cer-
tain sectors, regulation imposes a ceiling on the rate of return on capital that Þrms
are allowed to earn; this affects the demand for capital relative to labor (Averch
and Johnson (1962)). Finally, if product markets regulatory reforms occur together
with pri vatization (or nationalization) policies, changes in ownership structure can
also affect investment.
4
A related literature asks the question whether competition stimulates Þrms’ productivity. See,
for instance, Nickell (1996) who shows that both the level and growth rates of Þrms’ productivity are
positively affected by measures of competition. This suggests that regulatory reforms should have
positive productivity effects, insofar as they succeed in stimulating competition.
3
