Profits that persist above or below the norm for prolonged periods of time reveal a lack of competition and imply a systematic misallocation of resources. Competition, if unimpeded, should restore profits to normal levels within a relatively short time frame. The dynamics of profits can thus reveal a great deal about the competitiveness of an economy. This paper estimates the persistence of profits across the European Union (EU), which adds to our understanding of the competitiveness of 18 EU member states. By using a sample of approximately 4700 firms with 51,000 observations across the time period of 1995-2013, we find differences in the persistence of short-run profits, implying that there are differences in competitiveness across the EU. The Czech Republic and Greece are among the countries with the highest profit persistence, whereas the United Kingdom is among those with the lowest persistence of profits. Furthermore, we provide evidence that there are significant permanent rents present in the EU across countries as well as in the different broad sectors across the EU.
In competitive markets, profits deviating from the norm will not persist for extended periods. If unimpeded, entry and exit of firms should restore profits to competitive levels. This dynamic process is influenced by regulations that temporarily or permanently impede competition. We study how product market regulations (PMR)-as measured by the OECD-affect competition by their impact on the profit persistence (Wölfl et al. in Ten years of product market reform in OECD countries-insights from a revised PMR indicator, 2009, Product market regulation: extending the analysis beyond OECD countries, 2010). To examine profit dynamics, we follow the methodology developed by Mueller (Economica 44(176):369-380, 1977), which measures both the short run persistence of profits and the long run permanent rents. The method can be used to measure: (1) short run transitory rents; (2) long run permanent rents. To this end we use firm level data from 30 OECD countries over the period 1998-2013. Results show that PMR increase the permanent rents of firms but we find no significant effect on short run profit persistence. We conclude that PMR negatively influence competition and increase permanent rents, resulting in misallocation of resources.
We show how the type of alcohol consumed is related to the type of entrepreneurship present for economies in Europe. We differentiate between beer-, wine-, and spirit-drinking countries and distinguish between productive, unproductive, and destructive entrepreneurship. The underlying links do not emerge from drinking per se but rather the drinking habits and taste for beverage types capture deep cultural features and cultural similarities amongst the countries. Societies that prefer to drink beer are closer to each other culturally than those which prefer drinking wine or spirits. Therefore, the taste for alcohol type is merely an instrument in explaining cultural and institutional differences across entrepreneurship. Broadly speaking, beer-drinking countries are characterized by higher shares of productive entrepreneurship, wine-drinking countries with unproductive entrepreneurship, and spirit-drinking countries with destructive entrepreneurship. We discuss mechanisms in which the results are found and highlight a new research agenda, emphasizing the potential role of epigenetics.
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