The papers in this issue were presented at the April 2017 Economic Policy panel meeting in Valletta, Malta. All four papers consider critical and current policy issues, and received a lot of discussion at the meeting. They gauge whether the expansion of the regulatory state can explain the drop in entrepreneurship, estimate the effect of concentration in the mobile telephony market, assess the impact of labour market reforms in Italy and explore whether privileged tax treatment of patents results in higher R&D activity. REGULATORY BURDEN Regulatory overreach has been blamed by many politicians in the United States, including the current president, for the pronounced drop in entrepreneurship over the past three decades. And considering the negative correlation between regulation and entrepreneurship, one might think that there is indeed a causal link. Nathan Goldschlag and Alex Tabarrok undertake a more careful test of this hypothesis, combining entry and exit rates of enterprises on the industry-state level with a carefully constructed industry-level database on federal regulation. Specifically, counting the number of restrictive words or phrases such as ‘shall’, ‘must’, ‘may not’, ‘prohibited’ and ‘required’ in each section of text and applying machine learning to assign such restrictions to specific industries allows the construction of a measure of federal regulatory stringency on the industry level. Interestingly, changes in regulatory stringency correlate positively with changes in the number of lawyers during the first decade of the 21st century, providing credence to this measure. Their findings clearly indicate that the increase in regulation over the past years cannot explain the drop in entrepreneurship in the United States. Using an array of different methodologies and sample splits clearly shows that there is no significant relationship between changes in regulatory stringency and changes in industry-level entrepreneurship. While this leaves open the possibility that positive and negative effects of regulation cancel each other out in their effect on entrepreneurship, the reasons for a decline might be more fundamental, related to a decline in technological productivity, the rise of large enterprises or the geographic outsourcing of dynamism. In conclusion, the paper shows that the challenge of declining entrepreneurship is deeper than simple campaign slogans. MOBILE TELEPHONY Mergers and consolidation of companies are typically viewed as a threat to efficiency by economists, because they may generate monopolistic profits, lower exchanged quantities, increase prices and reduce consumers’ surplus. Christos Genakos, Tommaso Valletti and Frank Verboven show in their paper that these fears may be misplaced in the case of the mobile communication industry, where mergers and consolidations could have benefits that outweigh the cost of stepping away from perfect competition. Using a uniquely constructed panel of mobile operators’ prices and accounting information across 33 OECD countries between 2002 and 2014, these authors document, as expected, that more concentrated markets lead to higher end user prices. The novel and at first sight more surprising result is that they also lead to higher investment per mobile operator, though the impact on total investment at the industry level is not clear. The higher investment per mobile operator may have desirable efficiency consequences for a better functioning of mobile communication markets. The authors thus conclude that competition and regulatory authorities should pay attention to the potential trade-off between market power effects and efficiency gains stemming from agreements between firms. LABOUR MARKETS Labour market reforms aimed at reducing firing costs are a very hot policy topic in many European countries, particularly the southern ones. Whenever a government tries to intervene on the rules governing individual and collective layoffs, the opposition from labour market insiders often succeeds in preventing any substantial change. This opposition typically derives strength from the absence of causal evidence on the effects of these reforms. Indeed, economic theory suggests that the reduction of firing costs should increase efficiency but should also have an ambiguous effect on employment levels. The ultimate word on the sign and size of these effects can only come from the data, but is still largely missing. Paolo Sestitio and Eliana Viviano make progress on this important topic by cleverly exploiting the institutional features of the ‘Jobs Act’, the labour market reform implemented by the government of Matteo Renzi in Italy at the beginning of 2015. They are able to design a quasi-experimental strategy for the estimation of the causal effect of a reduction of firing costs (in particular a reduction of the uncertainty concerning these costs, related to judicial outcomes of firing litigations) on the number of new long-term hiring contracts. Their analysis is complicated by the fact that in the same period, the government also introduced fiscal incentives in favour of firms’ hiring. Disentangling the separate effects of these two policies and both of them from the underlying economic cycle is not easy, but these authors succeed in doing so by exploiting the different dates at which the policies were announced and then implemented. They conclude that out of the total number of new long-term hiring contracts, 20% are due to incentives and 8% are due to the new discipline of firing cost. While the first effect was obvious and expected, also given the size of the incentives, the second one was not and represents an important novel result that politicians and trade unions should take seriously into consideration. PATENT BOXES In recent years, patent boxes have played a prominent role in the discussion on how to promote and attract research and development. Patent boxes are tax incentives that grant reduced tax rates to income earned from intellectual property. Its opponents argue that these preferential tax treatments hardly stimulate R&D activities, but only affect patent location and, thereby, strengthen tax planning and tax competition. Despite this critique, the popularity of patent boxes strongly increased in recent years, during which they were introduced in many EU countries. In their paper, Annette Alstadsæter, Salvador Barrios, Gaetan Nicodeme, Agnieszka Maria Skonieczna and Antonio Vezzani use patent applications filed at the European Patent Office between 2000 and 2012 to study the effect of patent boxes on innovation activities and patent registration. Their sample includes the 2000 companies worldwide with the highest R&D spending. They distinguish between the impact of specific patent box characteristics, taking both tax and non-tax features into account. The authors find that tax advantages of patent boxes have a significant impact on the location of patents, especially attracting high value patents. The design of patent boxes, in terms of coverage of different intellectual property types and eligibility criteria, determines to which extent firms react to tax advantages. Patent boxes do not seem to foster local R&D activities. However, so-called development conditions of patent boxes, conditions that prescribe patent development (at least partly) within the country, may help to stimulate local R&D. © CEPR, CESifo, Sciences Po, 2018.
Economic Policy – Oxford University Press
Published: Jan 1, 2018
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