Entry Barriers, Idiosyncratic Distortions, and the Firm Size Distribution

Abstract

This paper studies the interaction between barriers to firm entry and distortions to allocative efficiency in a standard model of firm dynamics. We derive a strategy to infer entry barriers based on cross-country differences in the firm size distribution and idiosyncratic distortions. The inferred barriers resemble regulation-based indicators in advanced economies but are substantially higher in middle- and low-income countries. Regulation-based indicators cannot account for cross-country differences in average firm size and underestimate the aggregate productivity gains associated with their removal by up to 8 percent on average. (JEL D21, D24, H25, L11, L60)