Regulation, Allocative Efficiency and Productivity in OECD Countries

This paper relates diverging productivity performances across OECD countries over the past fifteen yearsto differences in the stringency of regulations in the product market. We first summarize industry-levelevidence linking these diverging patterns to delays in service markets reforms in the wake of the ICTshock. The evidence we survey suggests that, especially in continental EU countries, tight regulation ofservices has slowed down growth in ICT-using sectors, which use intermediate service inputs intensively.Based on harmonised cross-country firm-level data, we then provide new evidence that one of the keychannels through which inappropriate service regulations affect productivity growth is by hindering theallocation of resources towards the most dynamic and efficient firms. At the industry level, resources wereallocated less efficiently across firms in countries where service regulations are less market-friendly. Firmleveleconometric estimates confirm that anti-competitive service regulations hamper productivity growthin ICT-using sectors, with a particularly pronounced effect on firms that are catching up to the technologyfrontier and that are close to international best practice. In other words, regulations hurt in particular thosefirms that have the potential to excel in domestic and international markets.