QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16...

37
THE QUARTERLY JOURNAL OF ECONOMICS Vol. CXVII February 2002 Issue 1 THE REGULATION OF ENTRY* SIMEON DJANKOV RAFAEL LA PORTA FLORENCIO LOPEZ-DE-SILANES ANDREI SHLEIFER We present new data on the regulation of entry of start-up rms in 85 countries. The data cover the number of procedures, of cial time, and of cial cost that a start-up must bear before it can operate legally. The of cial costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unof cial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation bene ts politicians and bureaucrats. I. INTRODUCTION Countries differ signi cantly in the way in which they regu- late the entry of new businesses. To meet government require- ments for starting to operate a business in Mozambique, an entrepreneur must complete 19 procedures taking at least 149 business days and pay US$256 in fees. To do the same, an entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, and wait at least 62 business days to acquire the * We thank Tatiana Nenova, Ekaterina Trizlova, and Lihong Wang for able research assistance, and three anonymous referees, Abhijit Banerjee, Richard Caves, Edward Glaeser, Roumeen Islam, Simon Johnson, Lawrence Katz, David Laibson, Guy Pfeffermann, and seminar participants at George Mason University and the University of Maryland at College Park for helpful comments. The collection of data for this paper was nanced by the World Bank’s Research Advisory Group and the World Development Report 2002: Building Institutions for Markets. An appendix describing country data is available from the authors on request. © 2002 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. The Quarterly Journal of Economics, February 2002 1

Transcript of QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16...

Page 1: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

THE

QUARTERLY JOURNALOF ECONOMICS

Vol CXVII February 2002 Issue 1

THE REGULATION OF ENTRY

SIMEON DJANKOV

RAFAEL LA PORTA

FLORENCIO LOPEZ-DE-SILANES

ANDREI SHLEIFER

We present new data on the regulation of entry of start-up rms in 85countries The data cover the number of procedures ofcial time and ofcial costthat a start-up must bear before it can operate legally The ofcial costs of entryare extremely high in most countries Countries with heavier regulation of entryhave higher corruption and larger unofcial economies but not better quality ofpublic or private goods Countries with more democratic and limited governmentshave lighter regulation of entry The evidence is inconsistent with public interesttheories of regulation but supports the public choice view that entry regulationbenets politicians and bureaucrats

I INTRODUCTION

Countries differ signicantly in the way in which they regu-late the entry of new businesses To meet government require-ments for starting to operate a business in Mozambique anentrepreneur must complete 19 procedures taking at least 149business days and pay US$256 in fees To do the same anentrepreneur in Italy needs to follow 16 different procedures payUS$3946 in fees and wait at least 62 business days to acquire the

We thank Tatiana Nenova Ekaterina Trizlova and Lihong Wang for ableresearch assistance and three anonymous referees Abhijit Banerjee RichardCaves Edward Glaeser Roumeen Islam Simon Johnson Lawrence Katz DavidLaibson Guy Pfeffermann and seminar participants at George Mason Universityand the University of Maryland at College Park for helpful comments Thecollection of data for this paper was nanced by the World Bankrsquos ResearchAdvisory Group and the World Development Report 2002 Building Institutionsfor Markets An appendix describing country data is available from the authors onrequest

copy 2002 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnologyThe Quarterly Journal of Economics February 2002

1

necessary permits In contrast an entrepreneur in Canada cannish the process in two days by paying US$280 in fees andcompleting only two procedures

In this paper we describe the required procedures governingentry regulation as well as the time and the cost of followingthese procedures in 85 countries We focus on legal requirementsthat need to be met before a business can ofcially open its doorsthe ofcial cost of meeting these requirements and the minimumtime it takes to meet them if the government does not delay theprocess We then use these data to evaluate economic theories ofregulation Our work owes a great deal to De Sotorsquos [1990] path-breaking study of entry regulation in Peru Unlike De Soto welook at the ofcial requirements ofcial cost and ofcial timemdashand do not measure corruption and bureaucratic delays thatfurther raise the cost of entry

Pigoursquos [1938] public interest theory of regulation holds thatunregulated markets exhibit frequent failures ranging from mo-nopoly power to externalities A government that pursues socialefciency counters these failures and protects the public throughregulation As applied to entry this view holds that the govern-ment screens new entrants to make sure that consumers buy highquality products from ldquodesirablerdquo sellers Such regulation reducesmarket failures such as low quality products from y-by-nightoperators and externalities such as pollution It is ldquodone to ensurethat new companies meet minimum standards to provide a goodor service By being registered new companies acquire a type ofofcial approval which makes them reputable enough to engagein transactions with the general public and other businessesrdquo[SRI 1999 p 14] The public interest theory predicts that stricterregulation of entry as measured by a higher number of proce-dures in particular should be associated with socially superioroutcomes

The public choice theory [Tullock 1967 Stigler 1971 Peltz-man 1976] sees the government as less benign and regulation associally inefcient It comes in two avors In Stiglerrsquos [1971]theory of regulatory capture ldquoregulation is acquired by the in-dustry and is designed and operated primarily for its benetrdquoIndustry incumbents are able to acquire regulations that createrents for themselves since they typically face lower informationand organization costs than do the dispersed consumers In thistheory the regulation of entry keeps out the competitors andraises incumbentsrsquo prots Because stricter regulation raises bar-

2 QUARTERLY JOURNAL OF ECONOMICS

riers to entry it should lead to greater market power and protsrather than benets to consumers

A second strand of the public choice theory which we call thetollbooth view holds that regulation is pursued for the benet ofpoliticians and bureaucrats [McChesney 1987 De Soto 1990Shleifer and Vishny 1998] Politicians use regulation both tocreate rents and to extract them through campaign contributionsvotes and bribes ldquoAn important reason why many of these per-mits and regulations exist is probably to give ofcials the power todeny them and to collect bribes in return for providing the per-mitsrdquo [Shleifer and Vishny 1993 p 601] The capture and toll-booth theories are closely related in that they both address rentcreation and extraction through the political process The capturetheory emphasizes the benets to the industry while the toll-booth theory stresses those to the politicians even when theindustry is left worse off by regulation

In principle the collection of bribes in exchange for releasefrom regulation can be efcient In effect the government canbecome an equity holder in a regulated rm In practice howeverthe creation of rents for the bureaucrats and politicians throughregulation is often inefcient in part because the regulators aredisorganized and in part because the policies they pursue toincrease the rents from corruption are distortionary The analogyto tollbooths on a highway is useful Efcient regulation may callfor one toll for the use of a road or even no tolls if the operationof the road is most efciently nanced through general tax reve-nues In a political equilibrium however each town throughwhich the road passes might be able to erect its own tollboothToll collectors may also block alternative routes so as to force thetrafc onto the toll road For both of these reasons political tollcollection is inefcient

In the tollbooth theory the regulation of entry enables theregulators to collect bribes from the potential entrants and servesno social purpose ldquoWhen someone has nally made the decisionto invest he then is subjected to some of the worst treatmentimaginable In a few cases this treatment consists of outrightextortion presenting the investor with insurmountable delays orrepeated obstacles unless he makes a large payoff rdquo [WorldBank 1999 p 10] More extensive regulation should be associatedwith socially inferior outcomes particularly corruption

We assess the regulation of entry around the world from theperspective of these theories by addressing two broad sets of

3THE REGULATION OF ENTRY

questions First what are the consequences of the regulation ofentry and in particular who gets the rents If the regulation ofentry serves the public interest it should be associated withhigher quality of goods fewer damaging externalities andgreater competition Public choice theory in contrast predictsthat stricter regulation is most clearly associated with less com-petition and higher corruption

A second question we examine to distinguish the alternativetheories of regulation is which governments regulate entry Thepublic interest model predicts that governments whose interestsare more closely aligned with those of the consumers which wethink of as the more representative and more limited govern-ments should ceteris paribus regulate entry more strictly Incontrast the public choice model predicts that the governmentsleast subject to popular oversight should pursue the strictestregulations to benet themselves and possibly the incumbentrms Knowing who regulates thus helps to discriminate amongthe theories

Our analysis of exhaustive data on entry regulation in 85countries leads to the following conclusions The number of pro-cedures required to start up a rm varies from the low of 2 inCanada to the high of 21 in the Dominican Republic with theworld average of around 10 The minimum ofcial time for such astart-up varies from the low of 2 business days in Australia andCanada to the high of 152 in Madagascar assuming that thereare no delays by either the applicant or the regulators with theworld average of 47 business days The ofcial cost of followingthese procedures for a simple rm ranges from under 05 percentof per capita GDP in the United States to over 46 times per capitaGDP in the Dominican Republic with the worldwide average of47 percent of annual per capita income For an entrepreneurlegal entry is extremely cumbersome time-consuming and ex-pensive in most countries in the world

In a cross section of countries we do not nd that stricterregulation of entry is associated with higher quality productsbetter pollution records or health outcomes or keener competi-tion But stricter regulation of entry is associated with sharplyhigher levels of corruption and a greater relative size of theunofcial economy This evidence favors public choice over thepublic interest theories of regulation

In response a public interest theorist could perhaps arguethat heavy regulation in some countries is a reection of both

4 QUARTERLY JOURNAL OF ECONOMICS

signicant market failures and the unavailability of alternativemechanisms of addressing them such as good courts or freepress In addition corruption and a large unofcial economy maybe inadvertent consequences of benevolent regulation and hencecannot be used as evidence against the public interest view Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997 Acemoglu and Verdier2000] or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries Be-cause of this logic the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories

We nd that the countries with more open access to politicalpower greater constraints on the executive and greater politicalrights have less burdensome regulation of entrymdasheven control-ling for per capita incomemdashthan do the countries with less rep-resentative less limited and less free governments The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation of entry perhaps because theyhave fewer market failures or better alternative ways of dealingwith them The fact that better governments regulate entry lessalong with the straightforward interpretation of the evidence oncorruption and the unofcial economy point to the tollbooththeory entry is regulated because doing so benets theregulators

The next section describes the sample Section III presentsour basic results on the extent of entry regulation around theworld Section IV asks who gets the rents from regulation SectionV presents the main results on which governments regulateSection VI concludes

II DATA

A Construction of the Database

This paper is based on a new data set which describes theregulation of entry by start-up companies in 85 countries in 1999We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved inindustrial or commercial activity Specically we record all pro-cedures that are ofcially required of an entrepreneur in order to

5THE REGULATION OF ENTRY

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 2: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

necessary permits In contrast an entrepreneur in Canada cannish the process in two days by paying US$280 in fees andcompleting only two procedures

In this paper we describe the required procedures governingentry regulation as well as the time and the cost of followingthese procedures in 85 countries We focus on legal requirementsthat need to be met before a business can ofcially open its doorsthe ofcial cost of meeting these requirements and the minimumtime it takes to meet them if the government does not delay theprocess We then use these data to evaluate economic theories ofregulation Our work owes a great deal to De Sotorsquos [1990] path-breaking study of entry regulation in Peru Unlike De Soto welook at the ofcial requirements ofcial cost and ofcial timemdashand do not measure corruption and bureaucratic delays thatfurther raise the cost of entry

Pigoursquos [1938] public interest theory of regulation holds thatunregulated markets exhibit frequent failures ranging from mo-nopoly power to externalities A government that pursues socialefciency counters these failures and protects the public throughregulation As applied to entry this view holds that the govern-ment screens new entrants to make sure that consumers buy highquality products from ldquodesirablerdquo sellers Such regulation reducesmarket failures such as low quality products from y-by-nightoperators and externalities such as pollution It is ldquodone to ensurethat new companies meet minimum standards to provide a goodor service By being registered new companies acquire a type ofofcial approval which makes them reputable enough to engagein transactions with the general public and other businessesrdquo[SRI 1999 p 14] The public interest theory predicts that stricterregulation of entry as measured by a higher number of proce-dures in particular should be associated with socially superioroutcomes

The public choice theory [Tullock 1967 Stigler 1971 Peltz-man 1976] sees the government as less benign and regulation associally inefcient It comes in two avors In Stiglerrsquos [1971]theory of regulatory capture ldquoregulation is acquired by the in-dustry and is designed and operated primarily for its benetrdquoIndustry incumbents are able to acquire regulations that createrents for themselves since they typically face lower informationand organization costs than do the dispersed consumers In thistheory the regulation of entry keeps out the competitors andraises incumbentsrsquo prots Because stricter regulation raises bar-

2 QUARTERLY JOURNAL OF ECONOMICS

riers to entry it should lead to greater market power and protsrather than benets to consumers

A second strand of the public choice theory which we call thetollbooth view holds that regulation is pursued for the benet ofpoliticians and bureaucrats [McChesney 1987 De Soto 1990Shleifer and Vishny 1998] Politicians use regulation both tocreate rents and to extract them through campaign contributionsvotes and bribes ldquoAn important reason why many of these per-mits and regulations exist is probably to give ofcials the power todeny them and to collect bribes in return for providing the per-mitsrdquo [Shleifer and Vishny 1993 p 601] The capture and toll-booth theories are closely related in that they both address rentcreation and extraction through the political process The capturetheory emphasizes the benets to the industry while the toll-booth theory stresses those to the politicians even when theindustry is left worse off by regulation

In principle the collection of bribes in exchange for releasefrom regulation can be efcient In effect the government canbecome an equity holder in a regulated rm In practice howeverthe creation of rents for the bureaucrats and politicians throughregulation is often inefcient in part because the regulators aredisorganized and in part because the policies they pursue toincrease the rents from corruption are distortionary The analogyto tollbooths on a highway is useful Efcient regulation may callfor one toll for the use of a road or even no tolls if the operationof the road is most efciently nanced through general tax reve-nues In a political equilibrium however each town throughwhich the road passes might be able to erect its own tollboothToll collectors may also block alternative routes so as to force thetrafc onto the toll road For both of these reasons political tollcollection is inefcient

In the tollbooth theory the regulation of entry enables theregulators to collect bribes from the potential entrants and servesno social purpose ldquoWhen someone has nally made the decisionto invest he then is subjected to some of the worst treatmentimaginable In a few cases this treatment consists of outrightextortion presenting the investor with insurmountable delays orrepeated obstacles unless he makes a large payoff rdquo [WorldBank 1999 p 10] More extensive regulation should be associatedwith socially inferior outcomes particularly corruption

We assess the regulation of entry around the world from theperspective of these theories by addressing two broad sets of

3THE REGULATION OF ENTRY

questions First what are the consequences of the regulation ofentry and in particular who gets the rents If the regulation ofentry serves the public interest it should be associated withhigher quality of goods fewer damaging externalities andgreater competition Public choice theory in contrast predictsthat stricter regulation is most clearly associated with less com-petition and higher corruption

A second question we examine to distinguish the alternativetheories of regulation is which governments regulate entry Thepublic interest model predicts that governments whose interestsare more closely aligned with those of the consumers which wethink of as the more representative and more limited govern-ments should ceteris paribus regulate entry more strictly Incontrast the public choice model predicts that the governmentsleast subject to popular oversight should pursue the strictestregulations to benet themselves and possibly the incumbentrms Knowing who regulates thus helps to discriminate amongthe theories

Our analysis of exhaustive data on entry regulation in 85countries leads to the following conclusions The number of pro-cedures required to start up a rm varies from the low of 2 inCanada to the high of 21 in the Dominican Republic with theworld average of around 10 The minimum ofcial time for such astart-up varies from the low of 2 business days in Australia andCanada to the high of 152 in Madagascar assuming that thereare no delays by either the applicant or the regulators with theworld average of 47 business days The ofcial cost of followingthese procedures for a simple rm ranges from under 05 percentof per capita GDP in the United States to over 46 times per capitaGDP in the Dominican Republic with the worldwide average of47 percent of annual per capita income For an entrepreneurlegal entry is extremely cumbersome time-consuming and ex-pensive in most countries in the world

In a cross section of countries we do not nd that stricterregulation of entry is associated with higher quality productsbetter pollution records or health outcomes or keener competi-tion But stricter regulation of entry is associated with sharplyhigher levels of corruption and a greater relative size of theunofcial economy This evidence favors public choice over thepublic interest theories of regulation

In response a public interest theorist could perhaps arguethat heavy regulation in some countries is a reection of both

4 QUARTERLY JOURNAL OF ECONOMICS

signicant market failures and the unavailability of alternativemechanisms of addressing them such as good courts or freepress In addition corruption and a large unofcial economy maybe inadvertent consequences of benevolent regulation and hencecannot be used as evidence against the public interest view Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997 Acemoglu and Verdier2000] or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries Be-cause of this logic the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories

We nd that the countries with more open access to politicalpower greater constraints on the executive and greater politicalrights have less burdensome regulation of entrymdasheven control-ling for per capita incomemdashthan do the countries with less rep-resentative less limited and less free governments The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation of entry perhaps because theyhave fewer market failures or better alternative ways of dealingwith them The fact that better governments regulate entry lessalong with the straightforward interpretation of the evidence oncorruption and the unofcial economy point to the tollbooththeory entry is regulated because doing so benets theregulators

The next section describes the sample Section III presentsour basic results on the extent of entry regulation around theworld Section IV asks who gets the rents from regulation SectionV presents the main results on which governments regulateSection VI concludes

II DATA

A Construction of the Database

This paper is based on a new data set which describes theregulation of entry by start-up companies in 85 countries in 1999We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved inindustrial or commercial activity Specically we record all pro-cedures that are ofcially required of an entrepreneur in order to

5THE REGULATION OF ENTRY

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 3: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

riers to entry it should lead to greater market power and protsrather than benets to consumers

A second strand of the public choice theory which we call thetollbooth view holds that regulation is pursued for the benet ofpoliticians and bureaucrats [McChesney 1987 De Soto 1990Shleifer and Vishny 1998] Politicians use regulation both tocreate rents and to extract them through campaign contributionsvotes and bribes ldquoAn important reason why many of these per-mits and regulations exist is probably to give ofcials the power todeny them and to collect bribes in return for providing the per-mitsrdquo [Shleifer and Vishny 1993 p 601] The capture and toll-booth theories are closely related in that they both address rentcreation and extraction through the political process The capturetheory emphasizes the benets to the industry while the toll-booth theory stresses those to the politicians even when theindustry is left worse off by regulation

In principle the collection of bribes in exchange for releasefrom regulation can be efcient In effect the government canbecome an equity holder in a regulated rm In practice howeverthe creation of rents for the bureaucrats and politicians throughregulation is often inefcient in part because the regulators aredisorganized and in part because the policies they pursue toincrease the rents from corruption are distortionary The analogyto tollbooths on a highway is useful Efcient regulation may callfor one toll for the use of a road or even no tolls if the operationof the road is most efciently nanced through general tax reve-nues In a political equilibrium however each town throughwhich the road passes might be able to erect its own tollboothToll collectors may also block alternative routes so as to force thetrafc onto the toll road For both of these reasons political tollcollection is inefcient

In the tollbooth theory the regulation of entry enables theregulators to collect bribes from the potential entrants and servesno social purpose ldquoWhen someone has nally made the decisionto invest he then is subjected to some of the worst treatmentimaginable In a few cases this treatment consists of outrightextortion presenting the investor with insurmountable delays orrepeated obstacles unless he makes a large payoff rdquo [WorldBank 1999 p 10] More extensive regulation should be associatedwith socially inferior outcomes particularly corruption

We assess the regulation of entry around the world from theperspective of these theories by addressing two broad sets of

3THE REGULATION OF ENTRY

questions First what are the consequences of the regulation ofentry and in particular who gets the rents If the regulation ofentry serves the public interest it should be associated withhigher quality of goods fewer damaging externalities andgreater competition Public choice theory in contrast predictsthat stricter regulation is most clearly associated with less com-petition and higher corruption

A second question we examine to distinguish the alternativetheories of regulation is which governments regulate entry Thepublic interest model predicts that governments whose interestsare more closely aligned with those of the consumers which wethink of as the more representative and more limited govern-ments should ceteris paribus regulate entry more strictly Incontrast the public choice model predicts that the governmentsleast subject to popular oversight should pursue the strictestregulations to benet themselves and possibly the incumbentrms Knowing who regulates thus helps to discriminate amongthe theories

Our analysis of exhaustive data on entry regulation in 85countries leads to the following conclusions The number of pro-cedures required to start up a rm varies from the low of 2 inCanada to the high of 21 in the Dominican Republic with theworld average of around 10 The minimum ofcial time for such astart-up varies from the low of 2 business days in Australia andCanada to the high of 152 in Madagascar assuming that thereare no delays by either the applicant or the regulators with theworld average of 47 business days The ofcial cost of followingthese procedures for a simple rm ranges from under 05 percentof per capita GDP in the United States to over 46 times per capitaGDP in the Dominican Republic with the worldwide average of47 percent of annual per capita income For an entrepreneurlegal entry is extremely cumbersome time-consuming and ex-pensive in most countries in the world

In a cross section of countries we do not nd that stricterregulation of entry is associated with higher quality productsbetter pollution records or health outcomes or keener competi-tion But stricter regulation of entry is associated with sharplyhigher levels of corruption and a greater relative size of theunofcial economy This evidence favors public choice over thepublic interest theories of regulation

In response a public interest theorist could perhaps arguethat heavy regulation in some countries is a reection of both

4 QUARTERLY JOURNAL OF ECONOMICS

signicant market failures and the unavailability of alternativemechanisms of addressing them such as good courts or freepress In addition corruption and a large unofcial economy maybe inadvertent consequences of benevolent regulation and hencecannot be used as evidence against the public interest view Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997 Acemoglu and Verdier2000] or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries Be-cause of this logic the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories

We nd that the countries with more open access to politicalpower greater constraints on the executive and greater politicalrights have less burdensome regulation of entrymdasheven control-ling for per capita incomemdashthan do the countries with less rep-resentative less limited and less free governments The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation of entry perhaps because theyhave fewer market failures or better alternative ways of dealingwith them The fact that better governments regulate entry lessalong with the straightforward interpretation of the evidence oncorruption and the unofcial economy point to the tollbooththeory entry is regulated because doing so benets theregulators

The next section describes the sample Section III presentsour basic results on the extent of entry regulation around theworld Section IV asks who gets the rents from regulation SectionV presents the main results on which governments regulateSection VI concludes

II DATA

A Construction of the Database

This paper is based on a new data set which describes theregulation of entry by start-up companies in 85 countries in 1999We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved inindustrial or commercial activity Specically we record all pro-cedures that are ofcially required of an entrepreneur in order to

5THE REGULATION OF ENTRY

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 4: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

questions First what are the consequences of the regulation ofentry and in particular who gets the rents If the regulation ofentry serves the public interest it should be associated withhigher quality of goods fewer damaging externalities andgreater competition Public choice theory in contrast predictsthat stricter regulation is most clearly associated with less com-petition and higher corruption

A second question we examine to distinguish the alternativetheories of regulation is which governments regulate entry Thepublic interest model predicts that governments whose interestsare more closely aligned with those of the consumers which wethink of as the more representative and more limited govern-ments should ceteris paribus regulate entry more strictly Incontrast the public choice model predicts that the governmentsleast subject to popular oversight should pursue the strictestregulations to benet themselves and possibly the incumbentrms Knowing who regulates thus helps to discriminate amongthe theories

Our analysis of exhaustive data on entry regulation in 85countries leads to the following conclusions The number of pro-cedures required to start up a rm varies from the low of 2 inCanada to the high of 21 in the Dominican Republic with theworld average of around 10 The minimum ofcial time for such astart-up varies from the low of 2 business days in Australia andCanada to the high of 152 in Madagascar assuming that thereare no delays by either the applicant or the regulators with theworld average of 47 business days The ofcial cost of followingthese procedures for a simple rm ranges from under 05 percentof per capita GDP in the United States to over 46 times per capitaGDP in the Dominican Republic with the worldwide average of47 percent of annual per capita income For an entrepreneurlegal entry is extremely cumbersome time-consuming and ex-pensive in most countries in the world

In a cross section of countries we do not nd that stricterregulation of entry is associated with higher quality productsbetter pollution records or health outcomes or keener competi-tion But stricter regulation of entry is associated with sharplyhigher levels of corruption and a greater relative size of theunofcial economy This evidence favors public choice over thepublic interest theories of regulation

In response a public interest theorist could perhaps arguethat heavy regulation in some countries is a reection of both

4 QUARTERLY JOURNAL OF ECONOMICS

signicant market failures and the unavailability of alternativemechanisms of addressing them such as good courts or freepress In addition corruption and a large unofcial economy maybe inadvertent consequences of benevolent regulation and hencecannot be used as evidence against the public interest view Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997 Acemoglu and Verdier2000] or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries Be-cause of this logic the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories

We nd that the countries with more open access to politicalpower greater constraints on the executive and greater politicalrights have less burdensome regulation of entrymdasheven control-ling for per capita incomemdashthan do the countries with less rep-resentative less limited and less free governments The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation of entry perhaps because theyhave fewer market failures or better alternative ways of dealingwith them The fact that better governments regulate entry lessalong with the straightforward interpretation of the evidence oncorruption and the unofcial economy point to the tollbooththeory entry is regulated because doing so benets theregulators

The next section describes the sample Section III presentsour basic results on the extent of entry regulation around theworld Section IV asks who gets the rents from regulation SectionV presents the main results on which governments regulateSection VI concludes

II DATA

A Construction of the Database

This paper is based on a new data set which describes theregulation of entry by start-up companies in 85 countries in 1999We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved inindustrial or commercial activity Specically we record all pro-cedures that are ofcially required of an entrepreneur in order to

5THE REGULATION OF ENTRY

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 5: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

signicant market failures and the unavailability of alternativemechanisms of addressing them such as good courts or freepress In addition corruption and a large unofcial economy maybe inadvertent consequences of benevolent regulation and hencecannot be used as evidence against the public interest view Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997 Acemoglu and Verdier2000] or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries Be-cause of this logic the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories

We nd that the countries with more open access to politicalpower greater constraints on the executive and greater politicalrights have less burdensome regulation of entrymdasheven control-ling for per capita incomemdashthan do the countries with less rep-resentative less limited and less free governments The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation of entry perhaps because theyhave fewer market failures or better alternative ways of dealingwith them The fact that better governments regulate entry lessalong with the straightforward interpretation of the evidence oncorruption and the unofcial economy point to the tollbooththeory entry is regulated because doing so benets theregulators

The next section describes the sample Section III presentsour basic results on the extent of entry regulation around theworld Section IV asks who gets the rents from regulation SectionV presents the main results on which governments regulateSection VI concludes

II DATA

A Construction of the Database

This paper is based on a new data set which describes theregulation of entry by start-up companies in 85 countries in 1999We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved inindustrial or commercial activity Specically we record all pro-cedures that are ofcially required of an entrepreneur in order to

5THE REGULATION OF ENTRY

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 6: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

obtain all necessary permits and to notify and le with all requi-site authorities We also calculate the ofcial costs and timenecessary for the completion of each procedure under normalcircumstances The study assumes that the information is readilyavailable and that all governmental bodies function efcientlyand without corruption

We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations reports of development agencies such as the World Bankand USAID and government web pages on the Internet We thencontact the relevant government agencies to check the accuracy ofthe data Finally for each country we commission at least oneindependent report on entry regulation from a local law rm andwork with that rm and government ofcials to eliminate dis-agreements among them

We use ofcial sources for the number of procedures timeand cost If ofcial sources are conicting or the laws are ambigu-ous we follow the most authoritative source In the absence ofexpress legal denitions we take the government ofcialrsquos reportas the source If several ofcial sources have different estimatesof time and cost we take the median Absent ofcial estimates oftime and cost we take the estimates of local incorporation law-yers If several unofcial (eg a private lawyer) sources havedifferent estimates we again take the median

Our countries span a wide range of income levels and politi-cal systems The sample includes fourteen African countries nineEast Asian countries including China and Vietnam three SouthAsian countries (India Pakistan and Sri Lanka) all Central andEastern European countries except for Albania and some of theformer Yugoslav republics eight former Soviet Union republicsand Mongolia ten Latin American countries two Caribbeancountries (Dominican Republic and Jamaica) six Middle Easterncountries (Egypt Israel Jordan Lebanon Morocco and Tunisia)and all major developed countries

We record the procedures related to obtaining all the neces-sary permits and licenses and completing all the required in-scriptions verications and notications for the company to belegally in operation When there are multiple ways to beginoperating legally we choose the fastest in terms of time In somecountries entrepreneurs may not bother to follow ofcial proce-dures or bypass them by paying bribes or hiring the services ofldquofacilitatorsrdquo An entrepreneur in Georgia can start up a company

6 QUARTERLY JOURNAL OF ECONOMICS

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 7: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

after going through 13 procedures in 69 business days and paying$375 in fees Alternatively he may hire a legal advisory rm thatcompletes the start-up process for $610 in three business days Inthe analysis we use the rst set of numbers We do so because weare primarily interested in understanding the structure of ofcialregulation

Regulations of start-up companies vary across regions withina country across industries and across rm sizes For concrete-ness we focus on a ldquostandardizedrdquo rm which has the followingcharacteristics it performs general industrial or commercial ac-tivities it operates in the largest city1 (by population) it is ex-empt from industry-specic requirements (including environmen-tal ones) it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (eg liquor to-bacco gas) it is a domestically owned limited liability company2

its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity it rents (ie does not own) land and business premises ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals it has turnover of upto 10 times its start-up capital and it does not qualify for invest-ment incentives Although different legal forms are used in dif-ferent countries to set up the simplest rm to make comparisonswe need to look at the same form

Our data almost surely underestimate the cost and complex-ity of entry3 Start-up procedures in the provinces are oftenslower than in the capital Industry-specic requirements addprocedures Foreign ownership frequently involves additionalverications and procedures Contributions in kind often requireassessment of value a complex procedure that depends on thequality of property registries Finally purchasing land can bequite difcult and even impossible in some of the countries of thesample (for example in the Kyrgyz Republic)

1 In practice the largest city coincides with the capital city except in Aus-tralia (Melbourne) Brazil (Sao Paulo) Canada (Toronto) Germany (Frankfurt)Kazakhstan (Almaty) the Netherlands (Amsterdam) South Africa (Johannes-burg) Turkey (Istanbul) and the United States (New York)

2 If the Company Law allows for more than one privately owned businessform with limited liability we choose the more popular business form amongsmall companies in the country

3 The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business Our threemeasures are strongly positively correlated with these subjective assessments

7THE REGULATION OF ENTRY

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 8: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

B Denitions of Variables

We use three measures of entry regulation the number ofprocedures that rms must go through the ofcial time requiredto complete the process and its ofcial cost In the public interesttheory a more thorough screening process requires more proce-dures and demands more time In the public choice theory moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view)

Theoretical predictions regarding our measure of cost areambiguous A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose tonance such activity with broad taxes rather than with the directfees that we measure leading to low costs as we measure them Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if for example fees are veriable andcannot be expropriated by the regulator4 In contrast higher feesare unambiguously desirable as a tool to deter entry under thecapture theory Because of these ambiguities we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories

We keep track of all the procedures required by law to starta business A separate activity in the start-up process is a ldquopro-cedurerdquo only if it requires the entrepreneur to interact with out-side entities state and local government ofces lawyers audi-tors company seal manufacturers notaries etc For example alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and BylawsSince this activity involves only the entrepreneurs we do notcount it as a procedure Similarly most companies hire a lawyerto draft their Articles of Association However we do not countthat as a procedure unless the law requires that a lawyer beinvolved In the same vein we ignore procedures that the entre-preneur can avoid altogether (eg reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences5 Finally when ob-

4 Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft In the latter case the regulator must remit the ofcial fee tothe Treasury and therefore has no interest in that fee being high

5 In several countries our consultants advised us that certain procedureswhile not required are highly recommended because failure to follow them mayresult in signicant delays and additional costs We collected data on these

8 QUARTERLY JOURNAL OF ECONOMICS

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 9: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

taining a document requires several separate procedures involv-ing different ofcials we count each as a procedure For examplea Bulgarian entrepreneur receives her registration certicatefrom the Company Registry in Soa and then has to pay theassociated fee at an ofcially designated bank Even though bothactivities are related to ldquoobtaining the registration certicaterdquothey count as two separate procedures in the data

To measure time we collect information on the sequence inwhich procedures are to be completed and rely on ofcial guresas to how many business days it takes to complete each proce-dure We ignore the time spent to gather information and as-sume that all procedures are known from the very beginning Wealso assume that procedures are taken simultaneously wheneverpossible for maximum efciency Since entrepreneurs may havetrouble visiting several different institutions within the same day(especially if they come from out-of-town) we set the minimumtime required to visit an institution to be one day6 Anotherjustication for this approach is that the relevant ofces some-times open for business only briey both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 am and 2 pm

We estimate the cost of entry regulation based on all identi-able ofcial expenses fees costs of procedures and forms pho-tocopies scal stamps legal and notary charges etc All costgures are ofcial and do not include bribes which De Soto [1990]has shown to be signicant for registration Setup fees often varywith the level of start-up capital As indicated we report the costsassociated with starting to operate legally a rm with capitalequivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law Wehave experimented with other capital levels and found our resultsto be robust

Theoretical predictions for the cost of entry regulation areambiguous As an alternative measure we consider only the

procedures but did not include them in the variables presented here because wewanted to stick to the mandatory criterion We have rerun the regressions dis-cussed below including these highly recommended procedures The inclusion doesnot have a material impact on the results

6 In the calculation of time when two procedures can be completed on thesame day in the same building we count that as one day rather than two(following the urgings of ofcials in several countries where several ofces arelocated in the same building) Our results are not affected by this particular wayof computing time

9THE REGULATION OF ENTRY

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take averages by income level and report t-testscomparing the regulation of entry across income groups

The data show enormous variation in entry regulation acrosscountries The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 1048 for thewhole sample Very few entry regulations cover tax and laborissues The worldwide average number of labor and tax proce-dures are 194 and 202 respectively Procedures involving envi-ronmental issues and safety and health matters are even rarer(014 and 034 procedures on average respectively) Insteadmuch of what governments do to regulate entry falls into the

14 QUARTERLY JOURNAL OF ECONOMICS

category of screening procedures The worldwide average numberof such procedures facing a new entrant is 604

The number of procedures is highly correlated with both thetime and cost variables (see Table VI) The correlation of the (log)number of procedures with (log) time is 083 and with (log) cost is064 Translated into economic terms this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening For example com-pleting 19 procedures demands 149 business days and 1115percent of GDP per capita in Mozambique In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita The Dominican Republic is in a class of its owncompleting its 21 procedures requires 80 business days and feesof at least 463 times per capita GDP These gures are admit-tedly extreme within the sample yet meeting the ofcial entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita

When we aggregate time and out-of-pocket costs into anaggregate cost measure the results for some countries becomeeven more extreme The world average full cost measure rises to66 percent of per capita GDP but varies from 17 percent of percapita GDP for New Zealand to 495 times per capita GDP in theDominican Republic

Panel B of Table III reports averages of the total number ofprocedures and its components time and cost by quartiles of percapita GDP in 1999 Two patterns emerge First the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (ldquorich countriesrdquo) is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP This pattern merely reects the fact that the incomeelasticity of fees (in log levels) is about 02 Second countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries7 The total number ofprocedures in an average rich country is 68 which is signicantlylower than the rest-of-sample average of 118 (t-statistics are

7 One objection to this nding is that entrepreneurs in rich countries mightface more postentry regulations than they do in poor countries We have data onone aspect of postentry regulation namely the regulation of labor markets (seeDjankov et al [2001a]) The numbers of entry and of labor market regulations arepositively correlated across countries contrary to this objection

15THE REGULATION OF ENTRY

TA

BL

EII

TH

EV

AR

IAB

LE

S

Thi

sta

ble

desc

ribe

sth

eva

riab

les

coll

ecte

dfo

rth

e85

cou

ntri

esin

clud

edin

our

stud

yT

her

stco

lum

ngi

ves

the

nam

eof

the

vari

able

The

seco

nd

colu

mn

desc

ribe

sth

eva

riab

lean

dpr

ovid

esth

eso

urce

sfr

omw

hic

hit

was

coll

ecte

d

Var

iabl

eD

escr

ipti

on

Nu

mbe

rof

proc

edu

res

Th

enu

mbe

rof

diff

eren

tpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

inor

der

toob

tain

ale

gal

stat

usi

e

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sS

afet

yamp

Hea

lth

The

num

ber

ofdi

ffere

ntsa

fety

and

heal

thpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

lent

ity

Sour

ceA

utho

rsrsquoo

wn

calc

ulat

ions

E

nvir

onm

ent

Th

enu

mbe

rof

diff

eren

ten

viro

nm

enta

lpr

oced

ure

sth

ata

star

t-up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

uth

orsrsquo

own

calc

ulat

ion

sT

axes

Th

enu

mbe

rof

diff

eren

tta

xpr

oced

ures

that

ast

art-

upha

sto

com

ply

wit

hto

star

top

erat

ing

asa

lega

len

tity

So

urce

Aut

hors

rsquoow

nca

lcul

atio

ns

Lab

orT

he

num

ber

ofdi

ffer

ent

labo

rpr

oced

ures

that

ast

art-

up

has

toco

mpl

yw

ith

tost

art

oper

atin

gas

ale

gal

enti

tyS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ions

S

cree

ning

Th

enu

mbe

rof

diff

eren

tst

eps

that

ast

art-

upha

sto

com

ply

wit

hin

orde

rto

obta

ina

regi

stra

tion

cert

ica

teth

atar

eno

tas

soci

ated

wit

hsa

fety

and

heal

this

sues

the

envi

ronm

ent

taxe

sor

labo

rS

ourc

eA

utho

rsrsquoo

wn

calc

ulat

ion

sT

ime

Th

eti

me

itta

kes

toob

tain

lega

lst

atus

toop

erat

ea

rm

in

busi

ness

days

Aw

eek

has

ve

busi

ness

days

and

am

onth

has

twen

ty-t

wo

Sou

rce

Au

thor

srsquoow

nca

lcul

atio

ns

Cos

tT

he

cost

ofob

tain

ing

lega

lst

atus

toop

erat

ea

rm

asa

shar

eof

per

capi

taG

DP

in19

99I

tin

clu

des

all

iden

tia

ble

ofc

ial

expe

nses

(fee

sco

sts

ofpr

oced

ures

and

form

sph

otoc

opie

ss

cal

stam

psl

egal

and

nota

rych

arge

set

c)

The

com

pan

yis

assu

med

toh

ave

ast

art-

up

capi

tal

ofte

nti

mes

per

capi

taG

DP

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ulat

ions

C

ost

1ti

me

Th

eco

stof

obta

inin

gle

gal

stat

usto

oper

ate

ar

mas

ash

are

ofpe

rca

pita

GD

Pin

1999

It

incl

ude

sal

lid

enti

abl

eof

cia

lex

pens

es(f

ees

cost

sof

proc

edur

esan

dfo

rms

phot

ocop

ies

sca

lst

amps

leg

alan

dno

tary

char

ges

etc

)as

wel

las

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquo

sti

me

The

tim

eof

the

entr

epre

neu

ris

valu

edas

the

prod

uct

ofti

me

and

per

capi

taG

DP

in19

99ex

pres

sed

inpe

rbu

sine

ssda

yte

rms

The

com

pan

yis

assu

med

toh

ave

ast

art-

upca

pita

lof

ten

tim

esth

eG

DP

per

capi

tale

vel

in19

99S

ourc

eA

uth

orsrsquo

own

calc

ula

tion

sG

DP

PO

P1

999

Gro

ssdo

mes

tic

prod

uct

per

capi

tain

curr

ent

US

dol

lars

in19

99S

ourc

eW

orld

Ban

k[2

001]

Q

ual

ity

stan

dard

sN

umbe

rof

ISO

9000

cert

ica

tion

spe

rth

ousa

ndin

habi

tan

tsis

sued

byth

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

onas

of19

99to

each

cou

ntry

inth

esa

mpl

eldquoI

SO

stan

dard

sre

pres

ent

anin

tern

atio

nal

cons

ensu

son

the

stat

eof

the

art

inth

ete

chno

logy

conc

erne

d

IS

O90

00is

prim

aril

yco

nce

rned

wit

hqu

alit

ym

anag

emen

t

IS

Ode

velo

psvo

lunt

ary

tech

nica

lst

anda

rds

that

cont

ribu

teto

mak

ing

the

deve

lopm

ent

man

ufac

turi

ngan

dsu

pply

ofpr

odu

cts

and

serv

ices

mor

eef

cie

nt

safe

ran

dcl

eane

r

ISO

stan

dard

sal

sose

rve

tosa

fegu

ard

cons

umer

s

Whe

nan

orga

niz

atio

nh

asa

man

agem

ent

syst

emce

rti

edto

anIS

O90

00

th

ism

eans

that

the

proc

ess

inu

enci

ng

qual

ity

(IS

O90

00)

co

nfor

ms

toth

ere

leva

ntst

anda

rdrsquos

requ

irem

ents

rdquoS

ourc

eIn

tern

atio

nal

Org

aniz

atio

nfo

rS

tand

ardi

zati

on(w

ww

iso

ch

)W

ater

poll

utio

nE

mis

sion

sof

orga

nic

wat

erpo

llut

ants

(kil

ogra

ms

per

day

per

wor

ker)

for

1998

Mea

sure

din

term

sof

bioc

hem

ical

oxyg

ende

man

dw

hich

refe

rsto

the

amou

ntof

oxyg

enth

atba

cter

iain

wat

erw

ill

cons

ume

inbr

eaki

ng

dow

nw

aste

Em

issi

ons

per

wor

ker

are

tota

lem

issi

ons

divi

ded

byth

en

umbe

rof

indu

stri

alw

orke

rsS

ourc

eW

orld

Ban

k[2

001]

16 QUARTERLY JOURNAL OF ECONOMICS

Dea

ths

from

acci

dent

alpo

ison

ing

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byac

cide

ntal

pois

onin

gs(i

nclu

din

gby

drug

sm

edic

atio

nsb

io-p

rodu

cts

soli

dan

dliq

uid

subs

tanc

es

gase

san

dva

pors

)pe

rm

illi

onin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gur

e)

Sour

ceT

henu

mbe

rof

acci

dent

alde

aths

from

pois

onin

gis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

ng

ures

are

take

nfr

omW

orld

Ban

k[2

001]

D

eath

sfr

omin

test

inal

infe

ctio

ns

Log

ofth

enu

mbe

rof

deat

hs

cau

sed

byin

test

inal

infe

ctio

ns(i

nclu

din

gdi

gest

ive

diso

rder

s)pe

rm

illio

nin

habi

tan

tsA

vera

geof

the

year

s19

81th

roug

h19

94(t

hem

ost

rece

ntav

aila

ble

gu

re)

Sour

ceT

henu

mbe

rof

deat

hsfr

omin

test

inal

infe

ctio

nsis

take

nfr

omW

orld

Hea

lth

Org

aniz

atio

n[1

998]

P

opul

atio

n

gure

sar

eta

ken

from

Wor

ldB

ank

[200

1]

Siz

eof

the

uno

fci

alec

onom

yS

ize

ofth

esh

adow

econ

omy

asa

perc

enta

geof

GD

P(v

aryi

ngti

me

peri

ods)

Sou

rce

Aut

hor

srsquoow

nco

mpu

tati

ons

base

don

aver

agin

gov

eral

les

tim

ates

repo

rted

inS

chne

ider

and

Ens

te[2

000]

for

any

give

nco

unt

ryas

wel

las

San

anik

one

[199

6]fo

rB

urki

naF

aso

Ch

idze

ro[1

996]

for

Sen

egal

Tu

rnha

man

dS

chw

artz

[199

0]fo

rIn

don

esia

and

Pak

ista

na

ndK

asna

kogl

uan

dY

ayla

[200

0]fo

rT

urk

ey

Em

ploy

men

tin

the

uno

fci

alec

onom

yS

hare

ofth

ela

bor

forc

eem

ploy

edin

the

unof

cia

lec

onom

yin

the

capi

tal

city

ofea

chco

untr

yas

ape

rcen

tof

the

ofc

ial

labo

rF

igur

esar

eba

sed

onsu

rvey

san

dfo

rso

me

coun

trie

son

econ

omet

ric

esti

mat

esS

ourc

eS

chne

ider

[200

0]an

dth

eG

loba

lU

rban

Indi

cato

rsD

atab

ase

[200

0](w

ww

urb

anob

serv

ator

yor

gin

dic

ator

sda

taba

se)

Pro

duct

mar

ket

com

peti

tion

Sur

vey

mea

sure

ofth

eex

ten

tto

whi

chre

spon

dent

sag

ree

wit

hth

efo

llow

ing

stat

emen

tldquoC

ompe

titi

onin

the

loca

lm

arke

tis

inte

nse

and

mar

ket

shar

esu

ctua

teco

nsta

ntl

yrdquo

Scal

efr

om1

(str

ongl

ydi

sagr

ee)

thro

ugh

7(s

tron

gly

agre

e)S

ourc

eIM

D[2

001]

C

orru

ptio

nC

orru

ptio

npe

rcep

tion

inde

xfo

r19

99

Cor

rupt

ion

isde

ne

dbr

oadl

yas

ldquothe

mis

use

ofpu

blic

pow

erfo

rpr

ivat

ebe

net

se

g

brib

ing

ofpu

blic

ofc

ials

ki

ckba

cks

inpu

blic

proc

urem

ent

orem

bezz

lem

ent

ofpu

blic

fun

dsrdquo

Th

ein

dex

aver

ages

the

corr

upt

ion

scor

esgi

ven

byth

efo

llow

ing

sour

ces

(1)

Fre

edom

Hou

seN

atio

nsin

Tra

nsit

(FH

)(2

)G

allu

pIn

tern

atio

nal

(GI)

(3)

the

Eco

nom

ist

Inte

llige

nce

Uni

t(E

IU)

(4)

the

Inst

itu

tefo

rM

anag

emen

tD

evel

opm

ent

Lau

sann

e(I

MD

)(5

)th

eIn

tern

atio

nal

Cri

me

Vic

tim

Sur

vey

(IC

VS

)(6

)th

eP

olit

ical

and

Eco

nom

icR

isk

Con

sult

ancy

H

ong

Kon

g(P

ER

C)

(7)

Th

eW

all

Str

eet

Jour

nal

C

entr

alE

urop

ean

Eco

nom

icR

evie

w(C

EE

R)

(8)

the

Wor

ldB

ank

and

Uni

vers

ity

ofB

asel

(WB

UB

)(9

)th

eW

orld

Eco

nom

icF

oru

m(W

EF

)D

esce

ndi

ngsc

ore

from

1(m

ost

corr

upt

)to

10(l

east

corr

upt)

Sou

rce

Tra

nspa

ren

cyIn

tern

atio

nal

(ww

wt

ran

spar

ency

de

)E

xecu

tive

defa

cto

inde

pend

ence

Inde

xof

ldquoope

rati

on(d

efa

cto)

inde

pend

ence

ofch

ief

exec

utiv

erdquo

Des

cend

ing

scal

efr

om1

to7

(15

pure

indi

vidu

al2

5in

term

edia

teca

tego

ry3

5sl

ight

tom

oder

ate

lim

itat

ions

45

inte

rmed

iate

cate

gory

55

subs

tan

tial

lim

itat

ions

65

inte

rmed

iate

cate

gory

75

exec

utiv

epa

rity

orsu

bord

inat

ion)

A

vera

geof

the

year

s19

45th

roug

h19

98S

ourc

eJ

agge

rsan

dM

arsh

all

[200

0]

Con

stra

ints

onex

ecut

ive

pow

erIn

dex

ofco

nstr

ain

tson

the

exec

utiv

epo

wer

base

don

the

num

ber

ofef

fect

ive

veto

poin

tsin

aco

unt

ryV

eto

poin

tsin

clud

e(1

)an

effe

ctiv

ele

gisl

atu

re(r

epre

sent

stw

ove

topo

ints

inth

eca

seof

bica

mer

alsy

stem

s)(

2)an

inde

pend

ent

judi

ciar

yan

d(3

)a

stro

ngfe

dera

lsy

stem

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Hen

isz

[200

1]

Eff

ecti

vene

ssof

legi

slat

ure

Inde

xof

the

effe

ctiv

enes

sof

the

legi

slat

ure

A

scen

din

gsc

ale

from

1to

4(1

5no

legi

slat

ure

25

larg

ely

inef

fect

ive

35

part

lyef

fect

ive

45

effe

ctiv

e)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

Sou

rce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ngn

etw

ww

m

ain

htm

)C

ompe

titi

onin

the

legi

slat

urersquo

sno

min

atin

gpr

oces

s

Inde

xof

the

com

peti

tive

ness

ofth

eno

min

atin

gpr

oces

sfo

rse

ats

inth

ele

gisl

atur

eA

scen

ding

scal

efr

om1

to4

(15

nole

gisl

atur

e2

5n

onco

mpe

titi

ve

35

part

lyco

mpe

titi

ve4

5co

mpe

titi

ve)

Ave

rage

ofth

eye

ars

1945

thro

ugh

1998

So

urce

Th

eC

ross

-Nat

iona

lT

ime-

Ser

ies

Dat

aA

rchi

ve(w

ww

dat

aban

kss

iteh

osti

ng

net

ww

wm

ain

htm

)A

utoc

racy

Indi

cate

sth

eldquog

ener

alcl

osed

nes

sof

polit

ical

inst

itut

ion

srdquo

Sca

lefr

om0

to10

wit

h0

bein

glo

win

auto

crac

yan

d10

bein

ghi

ghin

auto

crac

yA

vera

geof

the

year

s19

45th

rou

gh19

98

Sour

ceJ

agge

rsan

dM

arsh

all

[200

0]

Pol

itic

alri

ghts

Inde

xof

polit

ical

righ

tsH

ighe

rra

ting

sin

dica

teco

untr

ies

that

com

ecl

oser

toth

eid

eals

sugg

este

dby

the

chec

klis

tqu

esti

ons

of(1

)fr

eean

dfa

irel

ecti

ons

(2)

thos

eel

ecte

dru

le(

3)th

ere

are

com

peti

tive

part

ies

orot

her

com

peti

tive

polit

ical

grou

ping

s(4

)th

eop

posi

tion

has

anim

port

ant

role

and

pow

era

nd(5

)th

een

titi

esha

vese

lf-de

term

inat

ion

oran

extr

emel

yhi

ghde

gree

ofau

tono

my

Ave

rage

ofth

eye

ars

1972

thro

ugh

1998

Sou

rce

Fre

edom

Hou

se[2

001]

L

egal

orig

inId

enti

es

the

lega

lor

igin

ofea

chC

ompa

nyL

awor

Com

mer

cial

Cod

eof

each

coun

try

Th

ere

are

ve

poss

ible

orig

ins

(1)

Eng

lish

Com

mon

Law

(2

)F

ren

chC

omm

erci

alC

ode

(3)

Ger

man

Com

mer

cial

Cod

e(4

)Sc

andi

navi

anC

omm

erci

alC

ode

and

(5)

Soc

iali

stC

omm

unis

tla

ws

Sou

rce

La

Por

taet

al

[199

8]

Rey

nold

san

dF

lore

s[1

989]

CIA

Wor

ldF

actb

ook

[200

1]

17THE REGULATION OF ENTRY

TA

BL

EII

IT

HE

DA

TA

Pan

elA

repo

rts

the

tota

lnu

mbe

rof

proc

edu

res

and

thei

rbr

eaku

pin

the

foll

owin

gv

eca

tego

ries

(1

)sa

fety

and

heal

th

(2)

envi

ronm

ent

(3)

taxe

s(4

)la

bor

and

(5)

scre

enin

gT

he

tabl

eal

sore

port

sth

eti

me

dire

ctco

st(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

soci

ated

wit

hm

eeti

nggo

vern

men

tre

quir

emen

ts

and

dire

ctco

stpl

us

the

mon

etiz

edva

lue

ofth

een

trep

rene

urrsquos

tim

e(a

sa

frac

tion

ofG

DP

per

capi

tain

1999

)as

wel

las

the

leve

lof

GD

Ppe

rca

pita

indo

llar

sin

1999

Cou

ntr

ies

are

sort

edin

asce

ndin

gor

der

onth

eba

sis

of(1

)th

eto

tal

num

ber

ofpr

oced

ures

(2

)ti

me

and

(3)

cost

P

anel

Bpr

esen

tsm

eans

ofth

eva

riab

les

byqu

arti

les

ofG

DP

per

capi

tain

1999

P

anel

Cpr

esen

tst-

stat

isti

csfo

rdi

ffer

ence

sin

mea

ns

acro

ssqu

arti

les

ofpe

rca

pita

GD

Pin

1999

T

able

IIde

scri

bes

the

vari

able

sin

deta

il

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvir

onm

ent

Tax

esL

abor

Scre

enin

gT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P1

999

Pan

elA

D

ata

Can

ada

20

01

01

20

0145

002

2519

320

Aus

tral

ia2

00

10

12

002

250

0305

200

50N

ewZe

alan

d3

00

10

23

000

530

0173

137

80D

enm

ark

30

01

02

30

1000

011

2032

030

Irel

and

30

01

02

160

1157

017

9719

160

Un

ited

Sta

tes

40

01

12

40

0049

001

6930

600

Nor

way

40

01

12

180

0472

011

9232

880

Un

ited

Kin

gdom

50

01

13

40

0143

003

0322

640

Hon

gK

ong

50

00

14

150

0333

009

3323

520

Mon

goli

a5

00

10

422

003

310

1211

350

Fin

land

50

01

31

240

0116

010

7623

780

Isra

el5

00

21

232

021

320

3412

158

60Zi

mba

bwe

50

02

12

470

1289

031

6952

0S

wed

en6

00

11

413

002

560

0776

250

40Ja

mai

ca6

00

21

324

018

790

2839

233

0Za

mbi

a6

00

21

329

060

490

7209

320

Pan

ama

70

01

15

150

3074

036

743

070

Sw

itze

rlan

d7

00

21

416

017

240

2364

383

50S

inga

pore

70

01

24

220

1191

020

7129

610

Lat

via

70

02

14

230

4234

051

542

470

Mal

aysi

a7

00

11

542

026

450

4325

340

0

18 QUARTERLY JOURNAL OF ECONOMICS

Sri

Lan

ka8

00

11

623

019

720

2892

820

Net

herl

ands

80

12

05

310

1841

030

8124

320

Bel

gium

80

01

25

330

0998

023

1824

510

Tai

wan

Ch

ina

80

01

25

370

0660

021

4013

248

Hun

gary

80

01

16

390

8587

101

474

650

Pak

ista

n8

00

21

550

034

960

5496

470

Per

u8

00

22

483

019

860

5306

239

0S

outh

Afr

ica

90

02

25

260

0844

018

843

160

Kyr

gyz

Rep

ubli

c9

00

11

732

025

320

3812

300

Tha

ilan

d9

00

32

435

006

390

2039

196

0N

iger

ia9

01

21

536

257

002

7140

310

Aus

tria

90

02

16

370

2728

042

0825

970

Tun

isia

90

00

27

410

1722

033

622

100

Slo

veni

a9

00

01

847

021

030

3983

989

0L

eban

on9

00

11

763

156

721

8192

370

0U

rugu

ay10

00

14

523

049

490

5869

590

0B

ulga

ria

100

02

08

270

1441

025

211

380

Chi

le10

00

32

528

013

080

2428

474

0G

erm

any

100

01

27

420

1569

032

4925

350

Gh

ana

100

11

44

450

2175

039

7539

0L

ith

uani

a10

20

21

546

005

460

2386

262

0C

zech

Rep

ubli

c10

00

12

765

008

220

3422

506

0In

dia

100

03

34

770

5776

088

5645

0Ja

pan

110

02

27

260

1161

022

0132

230

Uga

nda

112

02

16

290

3040

042

0032

0E

gypt

Ara

bR

ep

110

02

18

510

9659

116

991

400

Ken

ya11

00

23

654

050

700

7230

360

Arm

enia

110

01

19

550

1267

034

6749

0P

olan

d11

20

31

558

025

460

4866

396

0S

pain

110

04

25

820

1730

050

1014

000

Indo

nes

ia11

00

21

812

80

5379

104

9958

0C

roat

ia12

10

23

638

045

030

6023

458

0K

azak

hsta

n12

00

13

842

047

470

6427

123

0P

ortu

gal

120

02

28

760

1844

048

8410

600

Slo

vak

Rep

ubl

ic12

00

23

789

014

520

5012

359

0C

hina

120

05

25

920

1417

050

9778

0

19THE REGULATION OF ENTRY

TA

BL

EII

I(C

ON

TIN

UE

D)

Num

ber

ofpr

oced

ures

Saf

ety

ampH

ealt

hE

nvi

ronm

ent

Tax

esL

abor

Scr

eeni

ngT

ime

Cos

tC

ost

1ti

me

GD

P

PO

P19

99

Kor

ea

Rep

13

00

24

727

016

270

2707

849

0T

anza

nia

131

05

25

293

3520

346

8024

0U

krai

ne13

00

23

830

025

690

3769

750

Tur

key

130

02

29

440

1932

036

922

900

Mal

awi

135

21

14

520

1886

039

6619

0M

oroc

co13

10

33

657

021

260

4406

120

0G

eorg

ia13

20

11

969

060

480

8808

620

Bur

kina

Fas

o14

00

32

933

318

833

3203

240

Phi

lipp

ines

140

05

18

460

1897

037

371

020

Arg

enti

na14

00

45

548

010

190

2939

760

0Jo

rdan

141

02

110

640

5369

079

291

500

Ven

ezu

ela

141

13

36

104

010

600

5220

367

0G

reec

e15

00

42

936

058

600

7300

117

70F

ranc

e15

00

31

1153

014

300

3550

234

80B

razi

l15

00

75

363

020

140

4534

442

0M

exic

o15

12

23

767

056

640

8344

440

0M

ali

161

03

210

5924

0It

aly

160

05

38

620

2002

044

8219

710

Sen

egal

160

03

211

691

2331

150

9151

0E

cuad

or16

20

24

872

062

230

9103

131

0R

oman

ia16

12

13

997

015

310

5411

152

0V

ietn

am16

01

15

911

21

3377

178

5737

0M

adag

asca

r17

00

73

715

20

4263

103

4325

0C

olom

bia

182

04

57

480

1480

034

002

250

Moz

ambi

que

194

01

311

149

111

461

7106

230

Rus

sian

Fed

erat

ion

200

02

513

570

1979

042

592

270

Bol

ivia

200

12

710

882

6558

300

781

010

Dom

inic

anR

epub

lic

210

02

316

804

6309

495

0919

1S

amp

leav

erag

e10

48

034

014

204

194

604

474

00

4708

065

988

226

20 QUARTERLY JOURNAL OF ECONOMICS

Pan

elB

M

eans

byQ

uar

tile

sof

GD

Ppe

rca

pita

in19

99

1stQ

uart

ile6

770

000

051

591

144

0024

50

010

020

243

722n

dQ

uart

ile

111

00

240

142

142

386

1949

29

033

053

584

73rd

Qua

rtil

e12

33

052

014

219

233

714

531

00

410

621

568

4thQ

uar

tile

119

00

620

242

241

956

9063

76

108

134

349

Pan

elC

Tes

tof

mea

ns

(t-s

tati

stic

s)

1stvs

2n

dQ

uar

tile

24

20a

22

07b

20

872

135

23

64a

23

34a

23

71a

23

03a

23

97a

120

3a

1stvs

3rd

Qu

arti

le2

458

a2

302

a2

087

21

64b

22

82a

24

07a

24

21a

22

54b

23

19a

163

5a

1stvs

4th

Qua

rtil

e2

404

a2

208

a2

155

21

612

243

b2

318

a2

409

a2

353

a2

406

a17

31a

2nd

vs

3rdQ

uar

tile

21

172

134

000

20

110

102

151

20

542

052

20

596

14a

2nd

vs

4thQ

uart

ile

20

722

117

20

612

021

110

20

892

146

22

54b

22

73a

805

a

3rdvs

4th

Qua

rtil

e0

332

027

20

612

011

082

026

21

062

217

b2

227

b8

53a

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

21THE REGULATION OF ENTRY

reported in Panel C) Rich countries also have fewer safety andhealth tax and labor start-up procedures than the rest of thesample Similarly meeting government requirements takes ap-proximately 245 business days in rich countries statisticallysignicantly lower than the rest-of-sample mean of 554 days Incontrast countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them

To summarize the regulation of entry varies enormouslyacross countries It often takes the form of screening proceduresRich countries (ie those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries Inprinciple these ndings are consistent with both the public choiceand public interest theories Market failures might be more per-vasive in countries with incomes just below the rst quartile ofGDP per capita generating a greater demand for benign regula-tion in these countries Alternatively income levels may proxy forcharacteristics of political systems that allow politicians or in-cumbent rms to capture the regulatory process for their ownbenet In the next two sections we relate these patterns in thedata to the theories of regulation

IV WHO GETS THE RENTS FROM REGULATION

Theories of regulation differ in their predictions as to whogets its benets The public interest theory predicts that stricterentry regulation is associated with higher measured consumerwelfare In contrast the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms Stricterregulation should then be associated with higher corruption andless competition

Measuring rents is inherently extremely difcult especiallyacross countries In this section we present some measures thatwe have been able to nd that bearmdashalbeit quite imperfectlymdashonthe relevant theories To begin consider some variables bearingon the public interest theory These variables reect the activitiesof all rms in the country and not just the entrants The rst isa measure of a countryrsquos compliance with international qualitystandards It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality Second we consider the level of water pollutionwhich should fall if entry regulation aims to control externalities

22 QUARTERLY JOURNAL OF ECONOMICS

and does so successfully8 Third we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against the number of deaths from accidental poisoningand from intestinal infections9 In addition we include two mea-sures of the size of the unofcial economy based on estimates ofunofcial output and employment respectively Since rms op-erating unofcially avoid nearly all regulations a large size of theunofcial economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers10 Finally we use a survey mea-sure of ldquoproduct market competitionrdquo Stiffer entry regulationshould be associated with greater competition in the public inter-est theory and lacking competition in the public choice theoryespecially in its regulatory capture version

Table IV presents the results on these seven measures ofconsequences of regulation using the number of procedures asdependent variables For two reasons we run each regressionwith and without the log of per capita GDP First the number ofprocedures is correlated with income per capita and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income Second we use GDPper capita as a rough proxy of the prevalence of market failures ina country Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant whichallows us to focus on the consequences (and later causes) ofregulation separately from the need

The results in Table IV show that compliance with interna-tional quality standards declines as the number of proceduresrises Pollution levels do not fall with regulation levels The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything the opposite seems to be true evencontrolling for per capita income) More regulation is associatedwith a larger unofcial economy and statistically signicantly soif we use the unofcial employment variable Competition incountries with more regulation is perceived to be less intense

8 We have tried measures of air pollution and obtained similar results9 Due to reporting practices in poor countries the second variable might

better capture deaths from accidental poisoning in the poor countries according tothe World Health Organization [1998]

10 There is a large literature detailing how regulation can drive rms intothe unofcial economy where they can avoid some or all of these regulations Seefor example Johnson Kaufmann and Shleifer [1997] and Friedman JohnsonKaufmann and Zoido-Lobaton [2000]

23THE REGULATION OF ENTRY

TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES

The table presents the results of OLS regressions using the followingseven dependent variables (1) Quality standards as proxied by the numberof ISO 9000 certications (2) Water pollution (3) Deaths from accidentalpoisoning (4) Deaths from intestinal infection (5) Size of the unofcialeconomy as a fraction of GDP (6) Employment in the unofcial economyand (7) Product market competition The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999 Table II describes all variables in detail Robust standard errors areshown below the coefcients

Dependent variableNumber ofprocedures

LnGDPPOP1999 Constant

R2

N

Quality standards (ISOCertications)

2 02781a 07649a 03311(00496) (01268) 85

2 01595a 00771a 2 01140 05384(00443) (00131) (01484) 85

Water pollution 00127b 01557a 00247(00084) (00174) 76

2 00037 2 00131a 02984a 02310(00076) (00027) (00314) 76

Deaths from accidentalpoisoning 06588a 16357a 01179

(02057) (04381) 5700637 2 04525a 68347a 04109

(01958) (00933) (10929) 57

Deaths from intestinal infection 23049a 2 22697a 03451(03081) (06778) 6110501a 2 08717a 78494a 06259

(02971) (01012) (13048) 61

Size of the unofcial economyd 147553a 2 37982 02482(25698) (52139) 7364849b 2 61908a 671030a 05187

(25385) (10834) (137059) 73

Employment in the unofcialeconomy

194438a 2 41103 03132(25756) (59160) 46138512a 2 44585a 415133b 04477

2 36056 (13918) (176836) 46

Product market competition 2 04012a 57571a 01405(01213) (02511) 54

2 01418 02108a 33579a 03087(01202) (00680) (07749) 54

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percentd The regression on the size of the unofcial economy controls for the log of GDP per capita plus

unofcial economy income (ie GDP per capita (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do

24 QUARTERLY JOURNAL OF ECONOMICS

although this result is only statistically signicant without theincome control We have also run all regressions using cost andtime as independent variables and obtained qualitatively similarresults While the data are noisy none of the results support thepredictions of the public interest theory11

The negative results in Table IV should be interpreted withcaution First some of our measures of public goods such asdeaths from accidental poisoning are probably more relevant forpoor countries and in particular are unlikely to be inuenced byentry regulation for rich countries Accordingly it might be moreappropriate to perform the analysis separately for countries atdifferent income levels To this end we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample The data do not support the proposition thatin the subsample of poorer countries heavier regulation of entryis associated with better social outcomes or more competition

Second an even deeper concern with the results in Table IVis that despite our control for per capita income there is impor-tant unobserved heterogeneity among countries correlated withregulation which accounts for the results For example supposethat some countries have particularly egregious market failuresbut also especially poor alternative mechanisms for dealing withthem such as the press and the courts Regulation for examplemight be less infected by corruption than either the press or thejudiciary A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse but stillend up with inferior outcomes

We cannot dismiss this concern with the results of Table IValthough our later ndings cast doubt on its validity We run theregressions in Table IV using information on the freedom of thepress from Djankov McLiesh Nenova and Shleifer [2001] andnd that holding constant various measures of freedom of thepress and per capita income the number of procedures is still notassociated with superior social outcomes We also run the regres-sions in Table IV using a number of measures of citizen access to

11 Using data for publicly traded rms we have found no evidence thatcountries with heavier entry regulation have more protable rms as measuredby the return on assets These protability numbers however are very crude Wealso measured protability using the return on World-Bank-nanced projectsfrom the World Bank Operations Evaluation Department These data also yieldno evidence that more regulations are associated with greater returns

25THE REGULATION OF ENTRY

justice and of efciency of the judiciary from Djankov et al[2001b] Again we nd that holding constant these measuresand per capita income the number of procedures is associated ifanything with inferior social outcomes

A direct implication of the tollbooth hypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated In fact since in many countries in our sample politi-cians run businesses the regulation of entry produces the doublebenet of corruption revenues and reduced competition for theincumbent businesses already afliated with the politicians Fig-ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP12

Panel A of Table V shows statistically that consistent with thetollbooth theory more regulation is associated with worse corrup-tion scores The coefcients are statistically signicant (with andwithout controlling for income) and large in economic terms Theestimated coefcients imply that controlling for per capita GDPreducing the number of procedures by ten is associated with a

12 We have tried a number of measures of corruption all yielding similarresults We have made sure that our results do not depend on ldquored taperdquo being partof the measure of corruption

FIGURE IIICorruption and Number of Procedures

The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption

26 QUARTERLY JOURNAL OF ECONOMICS

reduction in corruption of 8 of a standard deviation roughly thedifference between France and Italy The results using the costand the time of meeting the entry regulations as independent

TABLE VEVIDENCE ON THE TOLLBOOTH THEORY

The table presents the results of OLS regressions using corruption as thedependent variable The independent variables are (1) the log of the numberof procedures (2) the log of time (3) the log of cost and the log of per capitaGDP in dollars in 1999 Panel A presents results for the 78 observationswith available corruption data Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median Table II describes all variables in detail Robust standarderrors are shown in parentheses below the coefcients

Panel A Results for the whole sample

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 31811a 2 18654a

(02986) (02131)Time 2 17566a 2 08854a

(01488) (01377)Cost 2 12129a 2 04978a

(01206) (01285)Ln GDPPOP1999 09966a 09765a 09960a

(00864) (01014) (01118)Constant 118741a 11345 110694a 00677 27520a 2 40893a

(07380) (09299) (05932) (11176) (02414) (07867)R2 04656 08125 04387 07662 04256 07306N 78 78 78 78 78 78

Panel B Results for countries above and below the world median GDP per capita

Countries abovemedian GDPPOP1999

Countries belowmedian GDPPOP1999

Independentvariable (1) (2) (3) (4) (5) (6)

Number ofprocedures

2 18729a 2 07841b

(02971) (03304)Time 2 08135a 2 00923

(01762) (02850)Cost 2 05327a 2 03408a

(01894) (01021)Ln GDPPOP1999 14811a 15871a 17621a 03993b 03680c 02117

(02265) (02789) (02913) (01735) (01802) (01718)Constant 2 36970 2 59027c 2 113736a 23246c 10098 13125

(24628) (29942) (25773) (12849) (18813) (11136)R2 07820 07155 06728 02362 01324 02830N 40 40 40 38 38 38

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

27THE REGULATION OF ENTRY

variables are also statistically signicant pointing further to therobustness of this evidence in favor of the tollbooth theory

One way to reconcile the ndings in Table V with the publicinterest theory is to argue that regulation has unintended conse-quences Thus benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind butare stymied by corruption and other enforcement failures Thistheory is not entirely consistent with our earlier nding thatpoorer countries in fact have more entry regulations than richcountries do A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median incomeThe results show that regulations actually have a stronger effecton corruption in the subsample of richer countries

On the second version of the unintended consequences argu-ment it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997 Ace-moglu and Verdier 2000] In countries whose markets are fraughtwith failures it might be better to have corrupt regulators thannone at all Corruption may be the price to pay for addressingmarket failures We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation

V WHO REGULATES ENTRY

In this section we focus on the political attributes of countriesthat regulate entry These attributes are intimately related to thecompeting hypotheses about regulation In the public interesttheory regulation remedies market failures The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and social prefer-ences should regulate entry more strictly In the empirical analy-sis that follows we identify such countries with more represen-tative and limited governments

In the public choice theory despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies ratherthan address market failures [Olson 1991 De Long and Shleifer1993] Such dictators need the political support of various inter-

28 QUARTERLY JOURNAL OF ECONOMICS

est groups and use distortionary policies to favor their friendsand to abuse their opponents The dictatorrsquos choice of distortion-ary policies is not mitigated by public pressure since he faces noelections When the public is less able to assert its preferencesthen we expect more distortionary policy choices Specically weexpect more representative and limited government to be associ-ated with lighter regulation of entry

One might argue in contrast that dictators should pursueefcient economic policies including light regulation of entry ifthey are politically secure and can ldquotaxrdquo the fruits of entry andgrowth One response discussed by Olson [1991] and De Longand Shleifer [1993] is that while a few dictators are politicallysecure and pursue enlightened policies most are not Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure and to enrich themselves andtheir supporters while still in power Democracy might notlengthen the horizons of politicians but it does limit theiropportunities

We collect data on a variety of characteristics of politicalsystems partly because we want to be exible regarding themeaning of ldquogood governmentrdquo Where possible we use variablesfrom different sources to check the robustness of our results Ourpolitical variables fall into four broad groups The rst includesthe de facto independence of the executive and an index of con-straints on the executive The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislaturersquos nominating process The third group includesa measure of autocracy and one of political rights

An additional variable that we focus on used in the earlierwork by La Porta et al [1998 1999] is legal origin We classifycountries based on the origin of their commercial laws into vebroad groups English French German Scandinavian and So-cialist Legal origin has been viewed as a proxy for the govern-mentrsquos proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al 1999]

Correlations among the political variables are presented inTable VI Political variables tend to be strongly correlated withinblocks For example the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (09761) and with the effectiveness of the legislature(09078) Yet we report results on all three variables as each

29THE REGULATION OF ENTRY

comes from a different source Similarly blocks of variables tendto be correlated with each other In particular democracy tends tobe positively associated with competitive and limited executiveand legislative branches Legal origin in contrast is insigni-cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government)13 Income levels are positively as-

13 Consistent with this nding La Porta et al [2001] nd that common lawlegal origin is associated with English constitutional guarantees of freedom such

TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES

The table reports correlations among measures of regulation and thevariables used in Table VII All variables are dened in Table II Signicancelevels are Bonferroni-adjusted

Exec defacto

independence

Constraintson executive

powerEffectiveness

legislatureCompetitionnominating Autocracy

Politicalrights

FrenchLO

Exec de factoindependence 10000

Constraints onexec power 09761a 10000

Effectivenesslegislature 09210a 09078a 10000

Competitionnominating 08243a 08069a 08484a 10000

Autocracy 2 09085a 2 08844a 2 08514a 2 07819a 10000

Political rights 08440a 08448a 08485a 07191a 2 08564a 10000French legal

origin 2 01814 2 01814 2 01901 2 01985 2 00258 00565 10000Socialist legal

origin 2 03321 2 02927 2 03236 2 03240 05475a 2 04572a 2 04169a

German legalorigin 02101 02008 02023 01281 2 01920 02444 2 02141

Scandinavianlegal origin 03391 03274 03378 02522 2 02978 03109 2 01727

English legalorigin 02259 01998 01462 02412 2 02324 00778 2 04874a

LnGDPPOP1999 06900a 06703a 07483a 06123a 2 06389a 07519a 2 00767b

Ln(Number ofprocedures) 2 05518a 2 05234a 2 05848a 2 04435b 04662a 2 04412a 04863a

Ln(Time) 2 05420a 2 05204a 2 05635a 2 04360b 04770a 2 04921a 03976b

Ln(Cost) 2 05070a 2 04937a 2 05656a 2 04177b 04075b 2 04588a 03472Ln(Cost 1

time) 2 05700a 2 05478a 2 06267a 2 04745a 04713a 2 05085a 03870b

a Signicant at 1 percent b signicant at 5 percent c signicant at 10 percent

30 QUARTERLY JOURNAL OF ECONOMICS

sociated with democracy as well as with competitive and limitedexecutive and legislative branches but not with the legal originThe fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model

In Table VII we present the results of regressing the number

as the independence of the judiciary and the accountability of the government tothe law These constitutional guarantees of freedom are strongly associated witheconomic freedoms but less so with political freedoms

TABLE VI(CONTINUED)

SocialistLO

GermanLO

ScandinavianLO

EnglishLO

LnGDP

POP1999

Ln(Number ofprocedures)

Ln(Time)

Ln(Cost)

Ln(Cost 1

time)

10000

2 01479 10000

2 01192 2 00612 10000

2 03365 2 01729 2 00139 10000

2 01995 03409 03133 2 00742 10000

01538b 00030b 2 03413b 2 05069a 2 04745a 10000

01869 2 00640 2 02914 2 04291b 2 05014a 08263a 10000

00319 2 00727 2 03007 2 02172 2 05953a 06354a 06147a 10000

00851 2 00933 2 02786 2 03094 2 06244a 07434a 07793a 09605 10000

31THE REGULATION OF ENTRY

TA

BL

EV

IIE

VID

EN

CE

ON

RE

GU

LA

TIO

NA

ND

PO

LIT

ICA

LA

TT

RIB

UT

ES

The

tabl

epr

esen

tsth

ere

sult

sof

runn

ing

regr

essi

ons

for

the

log

ofth

enu

mbe

rof

proc

edur

esas

the

depe

nde

nt

vari

able

W

eru

nse

ven

regr

essi

ons

usin

gva

riou

spo

liti

cal

indi

cato

rsde

scri

bed

inT

able

IIan

d(l

og)

GD

Ppe

rca

pita

R

obus

tst

anda

rder

rors

are

show

nin

pare

nth

eses

belo

wth

eco

efc

ient

s

Dep

ende

ntva

riab

le(1

)(2

)(3

)(4

)(5

)(6

)(7

)

Exe

cuti

vede

fact

oin

depe

nden

ce2

012

49a

(00

322)

Con

stra

ints

onex

ecut

ive

pow

er2

010

48a

(00

352)

Eff

ecti

vene

ssof

legi

slat

ure

20

3301

a

(00

778)

Com

peti

tion

nom

inat

ing

20

2763

b

(00

999)

Aut

ocra

cy0

0545

b

(00

178)

Pol

itic

alri

ghts

20

3470

(02

185)

Fre

nch

lega

lor

igin

072

45a

(00

916)

Soc

iali

stle

gal

orig

in0

4904

a

(01

071)

Ger

man

lega

lor

igin

072

76a

(01

363)

Sca

ndin

avia

nle

gal

orig

in2

000

85(0

173

3)L

nG

DP

PO

P19

99

20

0491

20

0634

c2

000

872

009

02b

20

0867

a2

009

39b

20

1434

a

(00

331)

(00

352)

(00

401)

(00

358)

(00

321)

(00

386)

(00

270)

Con

stan

t3

1782

a3

2040

a2

8709

a3

3540

a2

7457

a3

1850

a2

9492

a

(02

334)

(02

408)

(02

586)

(02

641)

(02

888)

(02

599)

(01

955)

R2

031

780

2872

034

240

2475

026

400

2350

062

56N

8484

7373

8484

85

aS

igni

can

tat

1pe

rcen

tb

sign

ica

ntat

5pe

rcen

tc

sign

ica

nt

at10

perc

ent

32 QUARTERLY JOURNAL OF ECONOMICS

of procedures on a constant and each of the political variablestaken one at a time and the log of per capita income In inter-preting these regressions we take the broad political measures oflimited and representative government as being exogenous toentry regulation It is possible of course that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors Even so it is interesting to knowwhat the correlation is Does the history that produces goodgovernment also produce many or few regulations of entry Thecontrol for the level of development is crucial (and in fact ourresults without this control are signicantly stronger) Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones Moreover our measures of goodgovernment are uniformly higher in richer countries Withoutincome controls our political variables may just proxy for incomelevels Imagine for example that the consumers in poor countriesare exposed to a larger risk from bad rms entering their marketsand selling goods of inferior quality The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries

Holding per capita income constant countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out ofsix measures of better government14 These results show thatcountries with more limited governments governments moreopen to competition and greater political rights have lighterregulation of entry even holding per capita income constantFigure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as AustraliaCanada New Zealand and the United States

The log of per capita GDP tends to enter these regressionssignicantly The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear In thepublic choice theory burdensome regulation reects transfers

14 Results are signicant in all six regressions when we use time ratherthan number of procedures as the dependent variable In contrast results areinsignicant in three regressions (competition in the legislaturersquos nominatingprocess autocracy and political rights) when using cost as the dependentvariable

33THE REGULATION OF ENTRY

from entrepreneurs or consumers which are likely to be distor-tionary and hence associated with lower levels of income Coun-tries may be poor because regulation is hostile to new businessformation

Holding per capita income constant countries of FrenchGerman and Socialist legal origin have more regulations thanEnglish legal origin countries while countries of Scandinavianlegal origin have about the same The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe statersquos proclivity to intervene in economic life [La Porta et al1999] However note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries

These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come

FIGURE IVAutocracy and Number of Procedures

The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score

34 QUARTERLY JOURNAL OF ECONOMICS

closer to representing the preferences of the public In contrastthese results are more difcult to reconcile with public interestunless one identies it with political systems of countries such asBolivia Mozambique or Vietnam where corruption is wide-spread governments are unlimited and property rights insecureOf course it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior Such a possibility strikes us as remote especiallysince we hold the level of development constant

VI CONCLUSION

An analysis of the regulation of entry in 85 countries showsthat even aside from the costs associated with corruption andbureaucratic delay business entry is extremely expensive espe-cially in the countries outside the top quartile of the incomedistribution We nd that heavier regulation of entry is generallyassociated with greater corruption and a larger unofcial econ-omy but not with better quality of private or public goods Wealso nd that the countries with less limited less democratic andmore interventionist governments regulate entry more heavilyeven controlling for the level of economic development

This evidence is difcult to reconcile with public interesttheories of regulation but supports the public choice approachespecially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987 Shleifer and Vishny 1993] Entry isregulated more heavily by less democratic governments and suchregulation does not yield visible social benets The principalbeneciaries appear to be the politicians and bureaucratsthemselves

WORLD BANK

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

SCHOOL OF MANAGEMENT YALE UNIVERSITY

DEPARTMENT OF ECONOMICS HARVARD UNIVERSITY

REFERENCES

Acemoglu Daron and Thierry Verdier ldquoThe Choice between Market Failures andCorruptionrdquo American Economic Review XC (2000) 194ndash211

Banerjee Abhijit ldquoA Theory of Misgovernancerdquo Quarterly Journal of EconomicsCXII (1997) 1289ndash1332

35THE REGULATION OF ENTRY

Central Intelligence Agency CIA World Factbook (2001) published online httpwwwciagovciapublicationsfactbook

Chidzero Anne-Marie ldquoSenegalrdquo in The Informal Sector and Micronance Insti-tutions in West Africa Leila Webster and Peter Fidler eds (Washington DCThe World Bank 1996)

De Long J Bradford and Andrei Shleifer ldquoPrinces and Merchants European CityGrowth before the Industrial Revolutionrdquo Journal of Law and EconomicsXXXVI (1993) 671ndash702

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoThe Regulation of Laborrdquo Harvard University manuscript in prepara-tion 2001a

Djankov Simeon Rafael La Porta Florencio Lopez-de-Silanes and Andrei Shlei-fer ldquoCourts The Lex Mundi Projectrdquo Harvard University 2001b

Djankov Simeon Caralee McLiesh Tatiana Nenova and Andrei Shleifer ldquoWhoOwns the Mediardquo NBER Working Paper No 8288 2001

De Soto Hernando The Other Path (New York NY Harper and Row 1990)Freedom House Freedom of the World (New York NY Freedom House 2001)Friedman Eric Simon Johnson Daniel Kaufmann and Pablo Zoido-Lobaton

ldquoDodging the Grabbing Hand The Determinants of Unofcial Activity in 69Countriesrdquo Journal of Public Economics LXXVI (2000) 459ndash 494

Henisz Witold Jerzy ldquoThe Institutional Environment for Economic GrowthrdquoEconomics and Politics XII (2000) 1ndash31

Institute for International Management Development World CompetitivenessReport (Lausanne Switzerland IMD 2001)

Jaggers Keith and Monty G Marshall ldquoPolity IV Projectrdquo Center for Inter-national Development and Conict Management University of Maryland2000

Johnson Simon Daniel Kaufmann and Andrei Shleifer ldquoThe Unofcial Econ-omy in Transitionrdquo Brookings Papers on Economic Activity 2 (1997)159ndash239

Kasnakoglu Zehra and Munur Yayla ldquoUnrecorded Economy in Turkey A Mone-tary Approachrdquo (1999) in Informal Sector in Turkey Volume I Tuncer Bu-lutay ed (Ankara Turkey SIS forthcoming)

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoLaw and Financerdquo Journal of Political Economy CVI (1998)1113ndash1155

La Porta Rafael Florencio Lopez-de-Silanes Andrei Shleifer and Robert WVishny ldquoThe Quality of Governmentrdquo Journal of Law Economics and Or-ganization XV (1999) 222ndash279

La Porta Rafael Florencio Lopez-de-Silanes Cristian Pop-Eleches and AndreiShleifer ldquoGuarantees of Freedomrdquo manuscript Harvard University 2001

McChesney Fred S ldquoRent Extraction and Rent Creation in the Economic Theoryof Regulationrdquo Journal of Legal Studies XVI (1987) 101ndash118

Olson Mancur ldquoAutocracy Democracy and Prosperityrdquo in Richard Zeckhausered Strategy of Choice (Cambridge MA MIT Press 1991)

Peltzman Sam ldquoToward a More General Theory of Regulationrdquo Journal of Lawand Economics XIX (1976) 211ndash240

Pigou Arthur C The Economics of Welfare 4th ed (London Macmillan and Co1938)

Reynolds Thomas H and Arturo A Flores Foreign Law Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton CO F BRothman 1989)

Sananikone Ousa ldquoBurkina Fasordquo in The Informal Sector and MicronanceInstitutions in West Africa Leila Webster and Peter Fidler eds (WashingtonDC The World Bank 1996)

Schneider Friedrich ldquoThe Value Added of Underground Activities Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the Worldrdquo mimeo 2000

Schneider Friedrich and Dominik H Enste ldquoShadow Economies Size Causesand Consequencesrdquo Journal of Economic Literature XXXVIII (2000) 77ndash114

Shleifer Andrei and Robert W Vishny ldquoCorruptionrdquo Quarterly Journal of Eco-nomics CVIII (1993) 599ndash617

36 QUARTERLY JOURNAL OF ECONOMICS

Shleifer Andrei and Robert W Vishny The Grabbing Hand Government Pa-thologies and their Cures (Cambridge MA Harvard University Press 1998)

SRI International International Practices and Experiences in Business StartupProcedures (Arlington VA SRI 1999)

Stigler George J ldquoThe Theory of Economic Regulationrdquo Bell Journal of Econom-ics and Management Science II (1971) 3ndash21

Tullock Gordon ldquoThe Welfare Cost of Tariffs Monopoly and Theftrdquo WesternEconomic Journal V (1967) 224ndash232

Turnham David Bernard Salome and Antoine Schwartz The Informal SectorRevisited (Paris OECD 1990)

World Bank ldquoAdministrative Barriers to Investment in Africa The Red TapeAnalysisrdquo FIAS Washington DC 1999

mdashmdash World Development Indicators (Washington DC The World Bank 2001)World Economic Forum The Global Competitiveness Report 2001 Klaus Schwab

et al eds (New York NY Oxford University Press 2001)World Health Organization Causes of Death and Life Birth Statistics (Geneva

Switzerland World Health Organization 1998)

37THE REGULATION OF ENTRY

Page 10: QUARTERLY JOURNAL OF ECONOMICS - Doing Business · entrepreneur in Italy needs to follow 16 different procedures, pay US$3946 in fees, andwait at least62business days to acquire the

component of the cost that goes to the government which in thesample averages about half the total cost The results for this costvariable are generally weaker than for the total out-of-pocketcost but go in the same direction Our basic cost estimates alsoignore the opportunity cost of the entrepreneurrsquos time and theforgone prots associated with bureaucratic delay To addressthis concern we calculate a ldquofull costrdquo measure which adds up theofcial expenses and an estimate of the value of the entrepre-neurrsquos time valuing his time at the countryrsquos per capita incomeper working day We report this number below and have repli-cated the analysis using it as a measure of cost The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost and hence are not presented

Table I lists typical procedures associated with setting up arm in our sample The procedures are further divided by theirfunction screening (a residual category which generally aims tokeep out ldquounattractiverdquo projects or entrepreneurs) health andsafety labor taxes and environment The basic procedure instarting up a business present everywhere is registering withthe Companiesrsquo Registry This can take more than one proceduresometimes there is a ldquopreliminary licenserdquo and a ldquonalrdquo licenseCombined with that procedure or as a separate procedure is thecheck for uniqueness of the proposed company name Add-onprocedures comprise the requirements to notarize the CompanyDeeds to open a bank account and deposit of start-up capital andto publish a notication of the companyrsquos establishment in anofcial or business paper Additional screening procedures thatinclude obtaining different certicates and ling with agenciesother than the Registry may add up to 97 days in delays as is thecase in Madagascar Another set of basic screening procedurespresent in almost every country in the data set covers certainmandatory municipal procedures registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-tive Ministries) In the Dominican Republic these procedures takeseven procedures and fourteen days There is large cross-countryvariation in terms of the number time and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-preneur does much of the legwork in the less efcient ones

Additional procedures appear in four areas The rst coverstax-related procedures which require seven procedures andtwenty days in Madagascar The second is labor regulations

10 QUARTERLY JOURNAL OF ECONOMICS

TABLE ILIST OF PROCEDURES FOR STARTING UP A COMPANY

This table provides a list of common procedures required to start up acompany in the 85 countries of the sample

1 Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate- File with the Statistical Bureau- File with the Ministry of Industry and Trade Ministry of the Economy or the

respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association2 Tax-related requirements

- Arrange automatic withdrawal of the employeesrsquo income tax from the company payrollfunds

- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal validate rubricate accounting books

3 Laborsocial security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund

4 Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry- Pass inspections and obtain certicates related to work safety building re

sanitation and hygiene5 Environment-related requirements

- Issue environmental declaration- Obtain environment certicate- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials- Register with the water management and water discharge authorities

11THE REGULATION OF ENTRY

which require seven procedures and 21 days in Bolivia The thirdarea is health and safety regulations which demand ve proce-dures and 21 business days in Malawi The nal area coverscompliance with environmental regulations which take two pro-cedures and ten days in Malawi if all goes well

Figures I and II describe the number time and cost of theprocedures needed to begin operating legally in New Zealand andFrance respectively New Zealandrsquos streamlined start-up processtakes only three procedures and three days The entrepreneurmust rst obtain approval for the company name from the web-site of the Registrar of Companies and then apply online forregistration with both the Registrar of Companies and the taxauthorities

In contrast the process in France takes 15 procedures and 53days To begin the founder needs to check the chosen companyname for uniqueness at the Institut National de la ProprieteIndustrielle (INPI) He then needs the mayorrsquos permit to use hishome as an ofce (If the ofce is to be rented the founder mustsecure a notarized lease agreement) The following documentsmust then be obtained each from a different authority proof of a

FIGURE IStart-up Procedures in New Zealand

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale

12 QUARTERLY JOURNAL OF ECONOMICS

clean criminal record an original extract of the entrepreneurrsquoscerticate of marital status from the City Hall and a power ofattorney The start-up capital is then deposited with a notarybank or Caisse des Depots and is blocked there until proof ofregistration is provided Notarization of the Articles of Associa-tion follows A notice stating the location of the headquartersofce is published in a journal approved for legal announcementsand evidence of the publication is obtained Next the founderregisters four copies of the articles of association at the local taxcollection ofce He then les a request for registration with theCentre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalitiesThe CFE must process the documents or return them in case therequest is incomplete The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers numeroSIRENE (Systeme Informatique pour le Repertoire des Entre-prises) numero SIRET (Systeme Informatique pour le Repertoiredes Etablissements) and numero NAF (Nomenclature des Activi-tees Francaises) The SIRET is used by among others the tax

FIGURE IIStart-up Procedures in France

Procedures are lined up sequentially on the horizontal axis and described in thetext box The time required to complete each procedure is described by the heightof the bar and measured against the left scale Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale

13THE REGULATION OF ENTRY

authorities The RNE also publishes a notice of the companyformation in the ofcial bulletin of civil and commercial an-nouncements The rm then obtains a proof of registration formldquoK-bisrdquo which is effectively its identity card To start legal opera-tions the entrepreneur completes ve additional procedures in-form the post ofce of the new enterprise designate a bondsmanor guarantee payment of taxes with a cash deposit unblock thecompanyrsquos capital by ling with the bank a proof of registration(K-bis) have the rmrsquos ledgers and registers initialed and le forsocial security The magazine LrsquoEntreprise comments ldquoTo be surethat the le for the Company Registry is complete many promot-ers check it with a counselorrsquos service which costs FF200 in Paris(about US$30) But therersquos always something missing and mostentrepreneurs end up using a lawyer to complete the procedurerdquo

III BASIC RESULTS

Table II describes all the variables used in this study TableIII presents the basic information from our sample Countries areranked in ascending order rst by the total number of entryprocedures then by the time it takes to complete them andnally by the cost of entry We classify each procedure as one ofve types safety and health environmental tax labor and aresidual category which we label ldquoscreeningrdquo whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs We then compute and report the total number ofprocedures and their breakdown into our ve categories for eachcountry We also report the minimum number of business daysthat are ofcially required to comply with entry regulations thecosts arising from the ofcial fees and the total costs whichimpute the entrepreneurrsquos time (as a fraction of GDP per capita)Finally we take a