The Impact of Regulation on Innovation

Abstract

We present a framework that can be used to assess the equilibrium impact of regulation on endogenous innovation with heterogeneous firms. We implement this model using French firm-level panel data, where there is a sharp increase in the burden of labor regulations on companies with 50 or more employees. Consistent with the model’s qualitative predictions, we find a fall in the fraction of innovating firms just to the left of the regulatory threshold. Furthermore, we find a reduction in the innovation response of firms to demand shocks just below the threshold. Regulation reduces aggregate innovation by 5.7 percent. (JEL D22, K31, L11, L25, L51, O31, O34)

Committing to Grow: Privatizations and Firm Dynamics in East Germany

“…The dismantling of these policies leads not only to increased entry, but also higher output growth in more exposed districts. We also analyze a policy distorting the firms' employment decisions, but focus on its dynamic implications, similar to recent papers by Aghion, Bergeaud, andVan Reenen 2023 andAkcigit, Alp, Akgunduz, Cilasun, andQuintero 2023. 3 We contribute to this literature by analyzing a unique policy creating distortions that are not only firm-specific but also actively push firms to grow or operate at a larger size.…”

Committing to Grow: Privatizations and Firm Dynamics in East Germany

“…The dismantling of these policies leads not only to increased entry, but also higher output growth in more exposed districts. We also analyze a policy distorting the firms' employment decisions, but focus on its dynamic implications, similar to recent papers by Aghion, Bergeaud, andVan Reenen 2023 andAkcigit, Alp, Akgunduz, Cilasun, andQuintero 2023. 3 We contribute to this literature by analyzing a unique policy creating distortions that are not only firm-specific but also actively push firms to grow or operate at a larger size.…”

Informal institutions and corporate innovation: A Perspective from Red Culture

“…Some perspectives posit that uncertainty in economic, market, and technological environments is both the cause and consequence of innovation behavior [ 36 ]. Consequently, in cultures that prioritize predictable norms, innovation may be stifled despite significant allocations of financial resources towards research and development [ 13 ]. Conversely, Red Culture, as a revolutionary response to exploitation and class struggle, accentuates pioneering and critical truth-seeking, embodying a spirit of self-renewal that fosters successful innovation.…”

“…Serving as a form of social control, culture can either encourage or impede various behaviors and decisions, including innovation [ 12 ]. In fact, some literature suggests that nearly all members of an organization possess the capability for innovation in an appropriate cultural environment [ 13 ]. As highlighted by Gao et al [ 2 ], culture, as a form of non-formal institution, plays a pivotal but often overlooked role as a fundamental source shaping innovation.…”