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Endogenous deregulation: evidence from OECD countries Duo and Roller, Economics Letters, 2003, 67-71 Introduction • Does deregulation affect productivity? (competition effect) • Is deregulation independent, or does it depend on other variables, such as political and institutional factors? (selection effect) • If we ignore second effect, do we overestimate the competition effect? Literature Review • Deregulation by increasing competition increases productivity. More firms are allowed to produce which will affect per unit costs, quality, welfare. • However, the decision to deregulate may not be independent (or exogenous). It may depend on other factors. Ignoring this relationship may over estimate the competitive effect. • Wilson (1993) for a survey. Model • Let s be the policy decision and q be the productivity. Then policy equation is: s f ( Polinst , regulinst , idea , q) u Market equation is defined as q g (demand , cos ts, marketstructure, s) v • The objective is to correctly estimate the effect of deregulation on productivity q / s OLS q / s 2 SLS Data • Data period is 1993-1997 • OECD International Regulations Database DATA: VARIABLE DEFINITIONS • s: ENTRY= 1,2,3 (for monopoly, duopoly, and oligopoly) • q: PRODUCTIVITY: total subscribers per employee • Instruments for political institutions: MAJORITARIAN, PRESIDENTIAL. • Instruments for regulatory institutions: ACCOUNTABILITY, INDEPENDENCE, RILE, PROREG. • Demand variables: GDP, Pop • Cost Variables: Investment per employee, Wage exp. per employee, • Time Trend: Empirical Results Empirical Results • In OLS regressions (ignoring simultaneity) is 0.485 and significant at 1% level. • In Simultaneous systems the coefficient is 0.247 and still significant (at 10% level). • OLS estimation overestimates the effect. Empirical Results • Others…. • In deregulation equation, – most of the political variables and institutional variables are significant with expected signs. – The productivity variables is positive and significant. • In the productivity equation, – Entry is positive and significant but the value is less. Conclusions • The impact of deregulation on productivity is positive and significant. • If it is estimated in a model which ignores simultaneity it is overestimated Thank you,