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THE

QUARTERLY JOURNALOF ECONOMICS

Vol. CXVII February 2002 Issue 1

THE REGULATION OF ENTRY*

SIMEON DJANKOVRAFAEL LA PORTA

FLORENCIO LOPEZ-DE-SILANESANDREI 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 Bank’s ResearchAdvisory Group and the World Development Report 2002: Building Institutionsfor Markets. An appendix describing country data is available from the authors onrequest.

© 2002 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnology.The 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 doors,the 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 Soto’s [1990] path-breaking study of entry regulation in Peru. Unlike De Soto, welook at the ofcial requirements, ofcial cost, and ofcial time—and do not measure corruption and bureaucratic delays thatfurther raise the cost of entry.

Pigou’s [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 “desirable” sellers. Such regulation reducesmarket failures such as low quality products from y-by-nightoperators and externalities such as pollution. It is “done 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 businesses”[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 Stigler’s [1971]theory of regulatory capture, “regulation is acquired by the in-dustry and is designed and operated primarily for its benet.”Industry 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 incumbents’ 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 1990;Shleifer and Vishny 1998]. Politicians use regulation both tocreate rents and to extract them through campaign contributions,votes, and bribes. “An 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-mits” [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, however,the 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 tollbooth.Toll 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. “When 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 . . .” [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 0.5 percentof per capita GDP in the United States to over 4.6 times per capitaGDP in the Dominican Republic, with the worldwide average of47 percent of annual per capita income. For an entrepreneur,legal 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 products,better 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


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 entry—even control-ling for per capita income—than 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 less,along 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 regulate.Section 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 1999.We 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


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, time,and 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 ofcial’s 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 (e.g., 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 of“facilitators.” An entrepreneur in Georgia can start up a company


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 “standardized” 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 (e.g., liquor, to-bacco, gas), it is a domestically owned limited liability company,2

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 (i.e., 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 entry.3 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.


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 regulator.4 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 “pro-cedure” 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 Bylaws.Since 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 (e.g., reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences.5 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 procedures,while not required, are highly recommended, because failure to follow them mayresult in signicant delays and additional costs. We collected data on these


taining a document requires several separate procedures involv-ing different ofcials, we count each as a procedure. For example,a 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 “obtaining the registration certicate,”they 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 day.6 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 a.m. and 2 p.m.

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.


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 entrepreneur’s time and theforgone prots associated with bureaucratic delay. To addressthis concern, we calculate a “full cost” measure, which adds up theofcial expenses and an estimate of the value of the entrepre-neur’s time, valuing his time at the country’s 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 “unattractive” projects or entrepreneurs), health andsafety, labor, taxes, and environment. The basic procedure instarting up a business, present everywhere, is registering withthe Companies’ Registry. This can take more than one procedure;sometimes there is a “preliminary license” and a “nal” license.Combined 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 company’s 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 procedures,present 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,


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 employees’ 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. Labor/social 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


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 Zealand’s 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 PropriétéIndustrielle (INPI). He then needs the mayor’s 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.


clean criminal record, an original extract of the entrepreneur’scerticate of marital status from the City Hall, and a power ofattorney. The start-up capital is then deposited with a notarybank or Caisse des Dépôts, 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 announcements,and 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 Formalités des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalities.The 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 (Système Informatique pour le Répertoire des Entre-prises), numero SIRET (Système Informatique pour le Répertoiredes Etablissements), and numero NAF (Nomenclature des Activi-tées 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.


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 form“K-bis,” 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 thecompany’s capital by ling with the bank a proof of registration(K-bis), have the rm’s ledgers and registers initialed, and le forsocial security. The magazine L’Entreprise comments: “To be surethat the le for the Company Registry is complete, many promot-ers check it with a counselor’s service, which costs FF200 in Paris(about US$30). But there’s always something missing, and mostentrepreneurs end up using a lawyer to complete the procedure.”

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 “screening,” 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 entrepreneur’s 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 10.48 for thewhole sample. Very few entry regulations cover tax and laborissues. The worldwide average number of labor and tax proce-dures are 1.94 and 2.02, respectively. Procedures involving envi-ronmental issues and safety and health matters are even rarer(0.14 and 0.34 procedures on average, respectively). Instead,much of what governments do to regulate entry falls into the


category of screening procedures. The worldwide average numberof such procedures facing a new entrant is 6.04.

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 0.83 and with (log) cost is0.64. 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 111.5percent 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 own:completing its 21 procedures requires 80 business days and feesof at least 4.63 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 1.7 percent of percapita GDP for New Zealand to 4.95 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 (“rich countries”) 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 0.2. 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 countries.7 The total number ofprocedures in an average rich country is 6.8 which is signicantlylower than the rest-of-sample average of 11.8 (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.


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uth

ors’

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ula

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s.S

afet

y&

Hea

lth

The

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ce:A

utho

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ulat

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nvir

onm

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Th

enu

mbe

rof

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eren

ten

viro

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ata

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ith

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ale

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enti

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uth

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Th

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ith

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Th

enu

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Th

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thor

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he

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tern

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Dea

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rupt

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(ww

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all

[200

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num

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rce:

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isz

[200

1].

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ecti

vene

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legi

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1945

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ross

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iona

lT

ime-

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Dat

aA

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ain

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ompe

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xof

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ve;4

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rage

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ross

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iona

lT

ime-

Ser

ies

Dat

aA

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ve(w

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s.”

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lefr

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glo

win

auto

crac

yan

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bein

ghi

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auto

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vera

geof

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year

s19

45th

rou

gh19

98.

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ce:J

agge

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all

[200

0].

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ting

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chec

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eean

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3)th

ere

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her

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peti

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ping

s;(4

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eop

posi

tion

has

anim

port

ant

role

and

pow

er;a

nd(5

)th

een

titi

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vese

lf-de

term

inat

ion

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extr

emel

yhi

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gree

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my.

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rage

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1972

thro

ugh

1998

.Sou

rce:

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edom

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se[2

001]

.L

egal

orig

inId

enti

es

the

lega

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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

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ren

chC

omm

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ode;

(3)

Ger

man

Com

mer

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e;(4

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andi

navi

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omm

erci

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ode;

and

(5)

Soc

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st/C

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].


http://www.urbanobservatory.org/indicators/database%29.http://www.transparency.de/%29.http://www.databanks.sitehosting.net/www/main.htm%29.http://www.databanks.sitehosting.net/www/main.htm%29.

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tain

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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 24.5 business days in rich countries, statisticallysignicantly lower than the rest-of-sample mean of 55.4 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 procedures.Rich countries (i.e., 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 bear—albeit quite imperfectly—onthe 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 country’s 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 pollution,which should fall if entry regulation aims to control externalities


and does so successfully.8 Third, we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against: the number of deaths from accidental poisoningand from intestinal infections.9 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 consumers.10 Finally, we use a survey mea-sure of “product market competition.” Stiffer entry regulationshould be associated with greater competition in the public inter-est theory, and lacking competition in the public choice theory,especially 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 results.9. 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. See,for example, Johnson, Kaufmann, and Shleifer [1997] and Friedman, Johnson,Kaufmann, and Zoido-Lobaton [2000].


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 economy;and (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

LnGDP/POP1999 Constant

R2

N

Quality standards (ISOCertications)

2 0.2781a 0.7649a 0.3311(0.0496) (0.1268) 85

2 0.1595a 0.0771a 2 0.1140 0.5384(0.0443) (0.0131) (0.1484) 85

Water pollution 0.0127b 0.1557a 0.0247(0.0084) (0.0174) 76

2 0.0037 2 0.0131a 0.2984a 0.2310(0.0076) (0.0027) (0.0314) 76

Deaths from accidentalpoisoning 0.6588a 1.6357a 0.1179

(0.2057) (0.4381) 570.0637 2 0.4525a 6.8347a 0.4109

(0.1958) (0.0933) (1.0929) 57

Deaths from intestinal infection 2.3049a 2 2.2697a 0.3451(0.3081) (0.6778) 611.0501a 2 0.8717a 7.8494a 0.6259

(0.2971) (0.1012) (1.3048) 61

Size of the unofcial economyd 14.7553a 2 3.7982 0.2482(2.5698) (5.2139) 736.4849b 2 6.1908a 67.1030a 0.5187

(2.5385) (1.0834) (13.7059) 73

Employment in the unofcialeconomy

19.4438a 2 4.1103 0.3132(2.5756) (5.9160) 4613.8512a 2 4.4585a 41.5133b 0.4477

2 3.6056 (1.3918) (17.6836) 46

Product market competition 2 0.4012a 5.7571a 0.1405(0.1213) (0.2511) 54

2 0.1418 0.2108a 3.3579a 0.3087(0.1202) (0.0680) (0.7749) 54

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

unofcial economy income (i.e., GDP per capita* (1 1 unofcial economy)) and not just by GDP per capita asall other regressions on the table do.


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 theory.11

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 that,in 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 failures,but also especially poor alternative mechanisms for dealing withthem, such as the press and the courts. Regulation, for example,might 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 IV,although 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.


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 GDP.12

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 GDP,reducing 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 “red tape” 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.


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 3.1811a 2 1.8654a

(0.2986) (0.2131)Time 2 1.7566a 2 0.8854a

(0.1488) (0.1377)Cost 2 1.2129a 2 0.4978a

(0.1206) (0.1285)Ln GDP/POP1999 0.9966

a 0.9765a 0.9960a

(0.0864) (0.1014) (0.1118)Constant 11.8741a 1.1345 11.0694a 0.0677 2.7520a 2 4.0893a

(0.7380) (0.9299) (0.5932) (1.1176) (0.2414) (0.7867)R2 0.4656 0.8125 0.4387 0.7662 0.4256 0.7306N 78 78 78 78 78 78

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

Countries abovemedian GDP/POP1999

Countries belowmedian GDP/POP1999

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

Number ofprocedures

2 1.8729a 2 0.7841b

(0.2971) (0.3304)Time 2 0.8135a 2 0.0923

(0.1762) (0.2850)Cost 2 0.5327a 2 0.3408a

(0.1894) (0.1021)Ln GDP/POP1999 1.4811

a 1.5871a 1.7621a 0.3993b 0.3680c 0.2117(0.2265) (0.2789) (0.2913) (0.1735) (0.1802) (0.1718)

Constant 2 3.6970 2 5.9027c 2 11.3736a 2.3246c 1.0098 1.3125(2.4628) (2.9942) (2.5773) (1.2849) (1.8813) (1.1136)

R2 0.7820 0.7155 0.6728 0.2362 0.1324 0.2830N 40 40 40 38 38 38

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


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 a

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

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