Skye RootECON 539

9 March 2009

Game Plan Central QuestionBackgroundDataMethod/ModelResultsPolicy ImplicationsQuestions?

Central QuestionHow does the existence and/or overall success of the executive, legislative, and judicial branches of a countries government affect regulation of entry for entrepreneurial start-up companies?

Background Mexico (2006) Literature Review

Data-Overview

1999 “The Regulation of Entry” paper by Simon Djankov

85 countries of all political shapes and economic sizes are represented in the data compilation.

The principle sources of information were the World Bank, the CIA website, USAID, and international law firms in each country.

Data-Variable DefinitionsVariable Description

Number of ProceduresTime

Cost

(E) Executive de facto independence

(E) Constraints on executive power

(L) Effectiveness of legislature

The number of different procedures that a start-up company has to comply with in order to obtain a legal status, i.e., to start a legal entity.

The time it takes to obtain legal status to operate a firm, in business days. A week has five business days and a month has twenty-two.

The cost of obtaining legal status to operate a firm as a share of per capita GDP in 1999.

Index of “operation (de facto) independence of chief executive.” Descending scale from 1 to 7 (1=pure individual; 3=slight limitations; 5=substantial limitations; 7=executive subordination). Average of the years 1945 through 1998.

Index of constraints on the executive power based on the number of effective veto points in a country. Veto points include (1) an effective legislature; (2) an independent judiciary; and (3) a strong federal system. Average of the years 1945 through 1998.

Index of the effectiveness of the legislature. Ascending scale from 1 to 4 (1=no legislature; 2=largely ineffective legislature; 3=partly effective; 4=effective). Average of the years 1945 through 1998.

(L) Competition in the legislature’s election process

Index of the competitiveness of the nominating process for seats in the legislature. Ascending scale from 1 to 4 (1=no legislature; 2=noncompetitive; 3=partly competitive; 4=competitive). Average of the years 1945 through 1998.

(P) Autocracy Index of the “general closedness of political institutions.” Scale from 0 to 10 with 0 being the low in autocracy and 10 being the high in autocracy. Average of the years 1945 through 1998

(P) Political rights Index of political rights. Higher ratings indicate countries that come closer to the ideals suggested by the checklist questions of (1) free and fair elections; (2) those elected rule; (3) there are competitive parties or other competitive political groupings; (4) the opposition has an important role and power. Average of the years 1945 through 1998.

(LO) Legal origin Indentifies the legal origin of each Company Law or Commercial Code of each county. There are five possible origins: (1) English Common Law; (2) French Commercial Code; (3) German Commercial Code; (4) Scandinavian Code; and (5) Socialist/Communist laws.

Data-Summary Statistics

Variable Observations Mean Std. Dev Min Max

ProceduresTimeCostLog proceduresLog timeLog costExecutive de facto independenceConstraints on executive powerEffectiveness of legislature Competition in the legislature’s election processAutocracy

8585848585848484737384

10.48 47.39

1312.892.243.596.394.324.311.751.473.51

4.37 30.79

989.320.510.881.361.781.850.900.512.65

22

11.590.690.692.451.57 1.2

000

21 152

7085.353.045.028.86

7732

7.85Political rights 84 0.55 0.31 0 1Legal origin-French 85 0.37 0.49 0 1Legal origin-Socialist 85 0.33 0.42 0 1Legal origin-English 85 0.28 0.45 0 1

Model/MethodsOLS Model

Dependant Variables: Procedures, Time, and Cost (LOG)Independent Variables: Exec, Leg, Judic, and Legal Orig.

White Test for Heteroskedasticity (Robust Correction)

Chow Test (partial F-test)

Interaction Term (English Legal Origin + Legislature)

ResultsVariable Log Procedures Log Time Log Cost

Executive de facto independence

Constraints on executive power

Effectiveness of legislature

Competition in the legislature’s election processAutocracy

Political rights

Legal origin-French

Legal origin-Socialist

Legal origin-English

Constant

R²NChow-All Political (F-stat) (p-value)Chow-Legal Origin (F-stat) (p-value)

-0.0455(0.1132)0.0698

(0.0830) -0.3940***

(0.0920) 0.3827***

(0.1032)0.0197

(0.0410)0.2229

(0.4084)0.2093

(0.1654)-0.0471(0.2299)

-0.4811**(0.1855)

2.9814***(0.5619)0.6287

735.27

0.0002***15.78

0.0000***

-0.2039(0.1993)0.1803

(0.1835) -0.3626**

(0.1587) 0.5846**

(0.2767)0.0052

(0.0642)-0.1149(0.6524)0.2898

(0.2867)0.0639

(0.3704) -0.7863**

(0.3716) 5.5255***

(0.9349)0.5551

731.39

0.232710.37

0.0000***

0.1919(0.3047)-0.0056(0.2367)

-0.7974**(0.3401)0.5417

(0.5113)-0.0300(0.1208)-1.0412(1.0014)0.2923

(0.4109)-0.8965(0.6496) -0.7879*(0.5163)1.8681

(1.5543)0.5365

731.60

0.16324.99

0.0037***

Results-ExplainedProcedures

1 unit effectiveness increase leads to 39.4% decrease in # procedures, and 1 unit competitive increase leads to 38.3% increase in procedures.

TimeOmitted Variable ProblemEnglish Legal Origin (78.6 % decrease in time)

CostLegislature and English Legal Origin againMulticollinearity between variables

Policy ImplicationsThe findings suggest that the judicial (legal origin)

does not really affect unless English, the executive does not significantly affect at all, and that the legislative have a consistent significant effect regardless of assumptions or corrections.

A more effective and competitive legislature is going to make it more expensive to start a company on average, but make the time and procedures less so.

Simply put, a more democratic legislature will lead to less regulation of entry and ultimately to increased entrepreneurial activity.

Questions/Comments