Firm entry deregulation, competition and returns to education and skill

Abstract

This paper studies the e¤ect of …rm entry deregulation on the returns to skill and education. We exploit a comprehensive episode of entry deregulation, unique in the industrialized world, as a quasi-natural experiment. Using matched employer-employee data for the universe of workers and …rms in Portugal, we show that increased product market competition, which resulted from deregulation, increased the returns to a university degree and the returns to skill. We verify that our results are not driven by changes in employment composition, and are unlikely to be driven by skill-biased technical change, or by workers who change skill levels after the deregulation.

The Effect of Competition on Executive Compensation and Incentives

“…We also account for the effects of the reform on the returns to education in all specifications. We find that the increased competition following the reform is associated with increased returns to education, particularly university degrees, in line with existing evidence (see Guadalupe, 2007;Fernandes et al, 2014). The coefficient on the Spot mt variable, β 1 , suggests that the reform had a negative effect, of around 1 percent, on the least educated of "other workers", the omitted category.…”

“…Finally, we continue to obtain, as in Fernandes et al (2014), positive coefficients on the interactions between the reform variable and the dummies for educational levels, suggesting on the main interactions with current year profit are statistically significant and similar in magnitude to those reported in Table 6. Overall these results suggest that short-term compensation is more responsive to current performance, and as such we use current year profits in our baseline estimations.…”

“…In particular, the next section investigates the prediction in Raith (2003), that competition through lower entry costs, and higher firm entry, leads to flatter managerial incentives and thus lower payperformance sensitivity. We studied the effect of the "On the Spot Firm" program on firm entry in previous work (Fernandes et al, 2014) and this section is based on that work.…”

The (Un) intended consequences of institutions lowering barriers to entrepreneurship: The impact on female workers

“…For example, the company's identification card, corporate taxpayer number and social security number would now all be issued on the same day. Indeed, studies show that, following the “On the Spot Firm” program, Portugal became one of the most suitable environments for entrepreneurship, with an estimated time cost of less than one hour and financial cost of 300 euros—which, as is evident in Figure , is well below the OECD average (Branstetter et al, ; Fernandes et al, ).…”

“…The Portuguese reform reduced the barriers to startup entry by decreasing bureaucratic and financial burdens on those starting new ventures. Evidence suggests that the timing of the reform's enactment across different municipalities is considered exogenous with respect to the socio‐economic characteristics of the municipalities themselves (e.g., Branstetter et al, ; Fernandes, Ferreira, and Alan Winters, ). Given the exogenous timing of the reform and its staggered nature, it is possible to estimate the effects of these institutional changes using a difference‐in‐differences methodology—with the “treatment” group composed of municipalities that are subject to these reforms, and the “control” group composed of municipalities that are not.…”