THEQUARTERLY JOURNAL
OF ECONOMICSVol. CXVII February 2002 Issue 1
THE REGULATION OF ENTRY*SIMEON DJANKOVRAFAEL LA PORTA
FLORENCIO LOPEZ-DE-SILANESANDREI SHLEIFER
We present new data on the regulation of entry of start-up rms in 85�countries. The data cover the number of procedures, ofcial time, and ofcial cost� �that a start-up must bear before it can operate legally. The ofcial costs of entry�are extremely high in most countries. Countries with heavier regulation of entryhave higher corruption and larger unofcial economies, but not better quality of�public or private goods. Countries with more democratic and limited governmentshave lighter regulation of entry. The evidence is inconsistent with public interesttheories of regulation, but supports the public choice view that entry regulationbenets politicians and bureaucrats.�
I. INTRODUCTION
Countries differ signicantly in the way in which they regu-�late the entry of new businesses.To meet government require-ments for starting to operate a business in Mozambique, anentrepreneur must complete 19 procedures taking at least 149business days and pay US$256 in fees. To do the same, anentrepreneur in Italy needs to follow 16 different procedures, payUS$3946 in fees, and wait at least 62 business days to acquire the
* We thank Tatiana Nenova, Ekaterina Trizlova, and Lihong Wang for ableresearch assistance,and three anonymous referees,Abhijit Banerjee, RichardCaves, Edward Glaeser, Roumeen Islam, Simon Johnson, Lawrence Katz, DavidLaibson, Guy Pfeffermann, and seminar participants at George Mason Universityand the University of Maryland at College Park for helpful comments.Thecollection of data for this paper was nanced by the World Bank’s Research�Advisory Group and the World Development Report 2002: Building Institutionsfor Markets. An appendix describing country data is available from the authors onrequest.
© 2002 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnology.The Quarterly Journal of Economics, February 2002
1
necessary permits.In contrast, an entrepreneur in Canada cannish the process in two days by paying US$280 in fees and�completing only two procedures.
In this paper we describe the required procedures governingentry regulation, as well as the time and the cost of followingthese procedures, in 85 countries. We focus on legal requirementsthat need to be met before a business can ofcially open its doors,�the ofcial cost of meeting these requirements, and the minimum�time it takes to meet them if the government does not delay theprocess. We then use these data to evaluate economic theories ofregulation. Our work owes a great deal to De Soto’s [1990] path-breaking study of entry regulation in Peru. Unlike De Soto,welook at the ofcial requirements, ofcial cost, and ofcial time—� � �and do not measure corruption and bureaucratic delays thatfurther raise the cost of entry.
Pigou’s [1938] public interest theory of regulation holds thatunregulated markets exhibit frequent failures, ranging from mo-nopoly power to externalities. A government that pursues socialefciency counters these failures and protects the public through�regulation. As applied to entry, this view holds that the govern-ment screens new entrants to make sure that consumers buy highquality products from “desirable” sellers. Such regulation reducesmarket failures such as low quality products from y-by-night�operators and externalities such as pollution. It is “done to ensurethat new companies meet minimum standards to provide a goodor service. By being registered, new companies acquire a type ofofcial approval, which makes them reputable enough to engage�in transactions with the general public and other businesses”[SRI 1999, p. 14]. The public interest theory predicts that stricterregulation of entry, as measured by a higher number ofproce-dures in particular, should be associated with socially superioroutcomes.
The public choice theory [Tullock 1967;Stigler 1971;Peltz-man 1976] sees the government as less benign and regulation associally inefcient.� It comes in two avors.� In Stigler’s [1971]theory of regulatory capture,“regulation is acquired by the in-dustry and is designed and operated primarily for its benet.”�Industry incumbents are able to acquire regulations that createrents for themselves, since they typically face lower informationand organization costs than do the dispersed consumers. In thistheory the regulation of entry keeps out the competitors andraises incumbents’ prots. Because stricter regulation raises bar-�
2 QUARTERLY JOURNAL OF ECONOMICS
riers to entry, it should lead to greater market power and prots�rather than benets to consumers.�
A second strand of the public choice theory, which we call thetollboothview, holds that regulation is pursued for the benet of�politicians and bureaucrats [McChesney 1987; De Soto 1990;Shleifer and Vishny 1998]. Politicians use regulation both tocreate rents and to extract them through campaign contributions,votes, and bribes. “An important reason why many of these per-mits and regulations exist is probably to give ofcials the power to�deny them and to collect bribes in return for providing the per-mits” [Shleifer and Vishny 1993,p. 601].The capture and toll-booth theories are closely related, in that they both address rentcreation and extraction through the political process. The capturetheory emphasizes the benets to the industry,� while the toll-booth theory stresses those to the politicians even when theindustry is left worse off by regulation.
In principle, the collection of bribes in exchange for releasefrom regulation can be efcient.� In effect, the government canbecome an equity holder in a regulated rm. In practice, however,�the creation of rents for the bureaucrats and politicians throughregulation is often inefcient, in part because the regulators are�disorganized,and in part because the policies they pursue toincrease the rents from corruption are distortionary. The analogyto tollbooths on a highway is useful. Efcient regulation may call�for one toll for the use of a road, or even no tolls if the operationof the road is most efciently nanced through general tax reve-� �nues. In a political equilibrium, however,each town throughwhich the road passes might be able to erect its own tollbooth.Toll collectors may also block alternative routes so as to force thetrafc onto the toll road.� For both of these reasons, political tollcollection is inefcient.�
In the tollbooth theory the regulation ofentry enables theregulators to collect bribes from the potential entrants and servesno social purpose. “When someone has nally made the decision�to invest, he then is subjected to some ofthe worst treatmentimaginable. . . In a few cases this treatment consists of outrightextortion: presenting the investor with insurmountable delays orrepeated obstacles unless he makes a large payoff . . .” [WorldBank 1999, p. 10]. More extensive regulation should be associatedwith socially inferior outcomes, particularly corruption.
We assess the regulation of entry around the world from theperspective ofthese theories by addressing two broad sets of
3THE REGULATION OF ENTRY
questions. First,what are the consequences of the regulation ofentry, and in particular,who gets the rents? If the regulation ofentry serves the public interest, it should be associated withhigher quality of goods, fewer damaging externalities, andgreater competition.Public choice theory, in contrast, predictsthat stricter regulation is most clearly associated with less com-petition and higher corruption.
A second question we examine to distinguish the alternativetheories of regulation is which governments regulate entry? Thepublic interest model predicts that governments whose interestsare more closely aligned with those of the consumers, which wethink of as the more representative and more limited govern-ments, should ceteris paribus regulate entry more strictly. Incontrast,the public choice model predicts that the governmentsleast subject to popular oversight should pursue the strictestregulations, to benet themselves and possibly the incumbent�rms. Knowing who regulates thus helps to discriminate among�the theories.
Our analysis of exhaustive data on entry regulation in 85countries leads to the following conclusions. The number of pro-cedures required to start up a rm varies from the low of 2 in�Canada to the high of 21 in the Dominican Republic, with theworld average of around 10. The minimum ofcial time for such a�start-up varies from the low of 2 business days in Australia andCanada to the high of 152 in Madagascar,assuming that thereare no delays by either the applicant or the regulators, with theworld average of 47 business days.The ofcial cost of following�these procedures for a simple rm ranges from under 0.5 percent�of per capita GDP in the United States to over 4.6 times per capitaGDP in the Dominican Republic,with the worldwide average of47 percent of annual per capita income.For an entrepreneur,legal entry is extremely cumbersome,time-consuming,and ex-pensive in most countries in the world.
In a cross section of countries,we do not nd that stricter�regulation of entry is associated with higher quality products,better pollution records or health outcomes, or keener competi-tion. But stricter regulation of entry is associated with sharplyhigher levels of corruption, and a greater relative size of theunofcial� economy.This evidence favors public choice over thepublic interest theories of regulation.
In response,a public interest theorist could perhaps arguethat heavy regulation in some countries is a reection of� both
4 QUARTERLY JOURNAL OF ECONOMICS
signicant market failures and the unavailability of alternative�mechanisms of addressing them, such as good courts or freepress. In addition, corruption and a large unofcial economy may�be inadvertent consequences of benevolent regulation, and hencecannot be used as evidence against the public interest view. Suchinadvertent consequences might obtain as a side effect of screen-ing out bad entrants [Banerjee 1997; Acemoglu and Verdier2000],or simply as a result of a well-intended but misguidedtransplant of rich-country regulations into poor countries.Be-cause of this logic, the question of which countries regulate entrymore heavily may be better suited conceptually to distinguish thealternative theories.
We nd that the countries with more open access to political�power, greater constraints on the executive, and greater politicalrights have less burdensome regulation of entry— even control-ling for per capita income—than do the countries with less rep-resentative, less limited, and less free governments. The percapita income control is crucial for this analysis because it couldbe argued that richer countries have both better governments anda lower need for the regulation ofentry, perhaps because theyhave fewer market failures or better alternative ways of dealingwith them. The fact that better governments regulate entry less,along with the straightforward interpretation of the evidence oncorruption and the unofcial� economy,point to the tollbooththeory: entry is regulated because doing so benets� theregulators.
The next section describes the sample.Section III presentsour basic results on the extent of entry regulation around theworld. Section IV asks who gets the rents from regulation. SectionV presents the main results on which governments regulate.Section VI concludes.
II. DATA
A. Construction of the DatabaseThis paper is based on a new data set,which describes the
regulation of entry by start-up companies in 85 countries in 1999.We are interested in all the procedures that an entrepreneurneeds to carry out to begin legally operating a rm involved in�industrial or commercial activity.Specically, we record all pro-�cedures that are ofcially required of an entrepreneur in order to�
5THE REGULATION OF ENTRY
obtain all necessary permits and to notify and le with all requi-�site authorities. We also calculate the ofcial� costs and timenecessary for the completion ofeach procedure under normalcircumstances. The study assumes that the information is readilyavailable and that all governmentalbodies function efciently�and without corruption.
We collect data on entry regulation using all available writ-ten information on start-up procedures from government publi-cations, reports of development agencies such as the World Bankand USAID, and government web pages on the Internet. We thencontact the relevant government agencies to check the accuracy ofthe data. Finally, for each country we commission at least oneindependent report on entry regulation from a local law rm, and�work with that rm and government ofcials to eliminate dis-� �agreements among them.
We use ofcial� sources for the number of procedures,time,and cost. If ofcial sources are conicting or the laws are ambigu-� �ous, we follow the most authoritative source.In the absence ofexpress legal denitions, we take the government ofcial’s report� �as the source. If several ofcial sources have different estimates�of time and cost, we take the median. Absent ofcial estimates of�time and cost,we take the estimates of local incorporation law-yers. If several unofcial� (e.g.,a private lawyer) sources havedifferent estimates, we again take the median.
Our countries span a wide range of income levels and politi-cal systems. The sample includes fourteen African countries, nineEast Asian countries including China and Vietnam, three SouthAsian countries (India, Pakistan, and Sri Lanka), all Central andEastern European countries except for Albania and some of theformer Yugoslav republics,eight former Soviet Union republicsand Mongolia, ten Latin American countries, two Caribbeancountries (Dominican Republic and Jamaica), six Middle Easterncountries (Egypt, Israel, Jordan, Lebanon, Morocco, and Tunisia),and all major developed countries.
We record the procedures related to obtaining all the neces-sary permits and licenses,and completing all the required in-scriptions,verications,� and notications for the company to be�legally in operation. When there are multiple ways to beginoperating legally, we choose the fastest in terms of time. In somecountries, entrepreneurs may not bother to follow ofcial proce-�dures or bypass them by paying bribes or hiring the services of“facilitators.” An entrepreneur in Georgia can start up a company
6 QUARTERLY JOURNAL OF ECONOMICS
after going through 13 procedures in 69 business days and paying$375 in fees. Alternatively, he may hire a legal advisory rm that�completes the start-up process for $610 in three business days. Inthe analysis, we use the rst set of numbers. We do so because we�are primarily interested in understanding the structure of ofcial�regulation.
Regulations of start-up companies vary across regions withina country, across industries, and across rm sizes. For concrete-�ness, we focus on a “standardized” rm, which has the following�characteristics:it performs general industrial or commercial ac-tivities, it operates in the largest city1 (by population),it is ex-empt from industry-specic requirements (including environmen-�tal ones),it does not participate in foreign trade and does nottrade in goods that are subject to excise taxes (e.g.,liquor, to-bacco, gas), it is a domestically owned limited liability company,2
its capital is subscribed in cash (not in-kind contributions) and isthe higher of (i) 10 times GDP per capita in 1999 or (ii) theminimum capital requirement for the particular type of businessentity, it rents (i.e., does not own) land and business premises, ithas between 5 and 50 employees one month after the commence-ment of operations all of whom are nationals, it has turnover of upto 10 times its start-up capital, and it does not qualify for invest-ment incentives.Although different legal forms are used in dif-ferent countries to set up the simplest rm, to make comparisons�we need to look at the same form.
Our data almost surely underestimate the cost and complex-ity of entry.3 Start-up procedures in the provinces are oftenslower than in the capital. Industry-specic requirements add�procedures.Foreign ownership frequently involves additionalverications and procedures. Contributions in kind often require�assessment ofvalue, a complex procedure that depends on thequality of property registries.Finally, purchasing land can bequite difcult and even impossible in some of the countries of the�sample (for example, in the Kyrgyz Republic).
1. In practice, the largest city coincides with the capital city except in Aus-tralia (Melbourne), Brazil (Sao Paulo), Canada (Toronto), Germany (Frankfurt),Kazakhstan (Almaty), the Netherlands (Amsterdam),South Africa (Johannes-burg), Turkey (Istanbul), and the United States (New York).
2. If the Company Law allows for more than one privately owned businessform with limited liability, we choose the more popular business form amongsmall companies in the country.
3. The World Economic Forum [2001] surveys business people on how impor-tant administrative regulations are as an obstacle to new business. Our threemeasures are strongly positively correlated with these subjective assessments.
7THE REGULATION OF ENTRY
B. Denitions of Variables�We use three measures ofentry regulation:the number of
procedures that rms must go through, the ofcial time required� �to complete the process, and its ofcial cost. In the public interest�theory, a more thorough screening process requires more proce-dures and demands more time. In the public choice theory, moreprocedures and longer delays facilitate bribe extraction (tollboothview) or make entry less attractive to potential competitors (cap-ture view).
Theoretical predictions regarding our measure ofcost areambiguous.A benevolent social planner who wants to spendsignicant resources on screening new entrants may choose to�nance such activity with broad taxes rather than with the direct�fees that we measure, leading to low costs as we measure them. Acorrupt regulator may also want to set fees low in order to raisehis own bribe income if, for example, fees are veriable and�cannot be expropriated by the regulator.4 In contrast, higher feesare unambiguously desirable as a tool to deter entry under thecapture theory.Because of these ambiguities,we present statis-tics on cost mainly to describe an important attribute of regula-tion and not to discriminate among theories.
We keep track of all the procedures required by law to starta business. A separate activity in the start-up process is a “pro-cedure” only if it requires the entrepreneur to interact with out-side entities:state and local government ofces,� lawyers, audi-tors, company seal manufacturers, notaries, etc. For example, alllimited liability companies need to hold an inaugural meeting ofshareholders to formally adopt the Company Articles and Bylaws.Since this activity involves only the entrepreneurs,we do notcount it as a procedure. Similarly, most companies hire a lawyerto draft their Articles of Association.However,we do not countthat as a procedure unless the law requires that a lawyer beinvolved. In the same vein, we ignore procedures that the entre-preneur can avoid altogether (e.g., reserving exclusive rights overa proposed company name until registration is completed) or thatcan be performed after business commences.5 Finally, when ob-
4. Shleifer and Vishny [1993] distinguish corruption with theft from corrup-tion without theft. In the latter case, the regulator must remit the ofcial fee to�the Treasury, and therefore has no interest in that fee being high.
5. In several countries, our consultants advised us that certain procedures,while not required, are highly recommended, because failure to follow them mayresult in signicant� delays and additional costs. We collected data on these
8 QUARTERLY JOURNAL OF ECONOMICS
taining a document requires several separate procedures involv-ing different ofcials, we count each as a procedure. For example,�a Bulgarian entrepreneur receives her registration certicate�from the Company Registry in Soa,� and then has to pay theassociated fee at an ofcially designated bank. Even though both�activities are related to “obtaining the registration certicate,”�they count as two separate procedures in the data.
To measure time, we collect information on the sequence inwhich procedures are to be completed and rely on ofcial gures� �as to how many business days it takes to complete each proce-dure. We ignore the time spent to gather information,and as-sume that all procedures are known from the very beginning. Wealso assume that procedures are taken simultaneously wheneverpossible, for maximum efciency. Since entrepreneurs may have�trouble visiting several different institutions within the same day(especially if they come from out-of-town),we set the minimumtime required to visit an institution to be one day. 6 Anotherjustication for this approach is that the relevant ofces some-� �times open for business only briey:� both the Ministry of Econ-omy and the Ministry of Justice in Cairo open for business onlybetween 11 a.m. and 2 p.m.
We estimate the cost of entry regulation based on all identi-able ofcial expenses: fees, costs of procedures and forms, pho-� �tocopies,scal� stamps, legal and notary charges, etc. All costgures are ofcial and do not include bribes, which De Soto [1990]� �has shown to be signicant for registration. Setup fees often vary�with the level of start-up capital. As indicated, we report the costsassociated with starting to operate legally a rm with capital�equivalent to the larger of (i) ten times per capita GDP in 1999 or(ii) the minimum capital requirement stipulated in the law.Wehave experimented with other capital levels and found our resultsto be robust.
Theoretical predictions for the cost ofentry regulation areambiguous.As an alternative measure, we consider only the
procedures, but did not include them in the variables presented here because wewanted to stick to the mandatory criterion.We have rerun the regressions dis-cussed below including these highly recommended procedures. The inclusion doesnot have a material impact on the results.
6. In the calculation of time, when two procedures can be completed on thesame day in the same building, we count that as one day rather than two(following the urgings of ofcials in several countries, where several ofces are� �located in the same building). Our results are not affected by this particular wayof computing time.
9THE REGULATION OF ENTRY
component of the cost that goes to the government, which in thesample averages about half the total cost. The results for this costvariable are generally weaker than for the total out-of-pocketcost, but go in the same direction.Our basic cost estimates alsoignore the opportunity cost ofthe entrepreneur’s time and theforgone prots associated with bureaucratic delay.� To addressthis concern, we calculate a “full cost” measure, which adds up theofcial� expenses and an estimate ofthe value of the entrepre-neur’s time,valuing his time at the country’s per capita incomeper working day.We report this number below,and have repli-cated the analysis using it as a measure of cost. The resultsobtained using this cost measure are very similar to those usingthe raw data on time and cost, and hence are not presented.
Table I lists typical procedures associated with setting up arm in our sample. The procedures are further divided by their�function: screening (a residual category, which generally aims tokeep out “unattractive” projects or entrepreneurs),health andsafety, labor, taxes, and environment. The basic procedure instarting up a business,present everywhere,is registering withthe Companies’ Registry. This can take more than one procedure;sometimes there is a “preliminary license” and a “nal” license.�Combined with that procedure, or as a separate procedure, is thecheck for uniqueness of the proposed company name.Add-onprocedures comprise the requirements to notarize the CompanyDeeds, to open a bank account and deposit of start-up capital, andto publish a notication of� the company’s establishment in anofcial� or business paper.Additional screening procedures thatinclude obtaining different certicates and ling with agencies� �other than the Registry may add up to 97 days in delays, as is thecase in Madagascar.Another set of basic screening procedures,present in almost every country in the data set,covers certainmandatory municipalprocedures,registrations with statisticalofces and with Chambers of Commerce and Industry (or respec-�tive Ministries). In the Dominican Republic these procedures takeseven procedures and fourteen days. There is large cross-countryvariation in terms of the number, time, and cost of screeningprocedures as the Company Registry performs many of thesetasks automatically in the most efcient countries but the entre-�preneur does much of the legwork in the less efcient ones.�
Additional procedures appear in four areas. The rst covers�tax-related procedures, which require seven procedures andtwenty days in Madagascar. The second is labor regulations,
10 QUARTERLY JOURNAL OF ECONOMICS
TABLE IL IST OF PROCEDURES FOR STARTING UP A COMPANY
This table provides a list of common proceduresrequired to start up acompany in the 85 countries of the sample.
1. Screening procedures- Certify business competence- Certify a clean criminal record- Certify marital status- Check the name for uniqueness- Notarize company deeds- Notarize registration certicate�- File with the Statistical Bureau- File with the Ministry of Industry and Trade, Ministry of the Economy, or the
respective ministries by line of business- Notify municipality of start-up date- Obtain certicate of compliance with the company law�- Obtain business license (operations permit)- Obtain permit to play music to the public (irrespective of line of business)- Open a bank account and deposit start-up capital- Perform an ofcial audit at start-up�- Publish notice of company foundation- Register at the Companies Registry- Sign up for membership in the Chamber of Commerce or Industry or the Regional
Trade Association2. Tax-related requirements
- Arrange automatic withdrawal of the employees’income tax from the company payrollfunds
- Designate a bondsman for tax purposes- File with the Ministry of Finance- Issue notice of start of activity to the Tax Authorities- Register for corporate income tax- Register for VAT- Register for state taxes- Register the company bylaws with the Tax Authorities- Seal, validate, rubricate accounting books
3. Labor/social security-related requirements- File with the Ministry of Labor- Issue employment declarations for all employees- Notarize the labor contract- Pass inspections by social security ofcials�- Register for accident and labor risk insurance- Register for health and medical insurance- Register with pension funds- Register for Social Security- Register for unemployment insurance- Register with the housing fund
4. Safety and health requirements- Notify the health and safety authorities and obtain authorization to operate from the
Health Ministry- Pass inspections and obtain certicates related to work safety, building,� re,�
sanitation, and hygiene5. Environment-related requirements
- Issue environmental declaration- Obtain environment certicate�- Obtain sewer approval- Obtain zoning approval- Pass inspections from environmental ofcials�- Register with the water management and water discharge authorities
11THE REGULATION OF ENTRY
which require seven procedures and 21 days in Bolivia. The thirdarea is health and safety regulations, which demand ve proce-�dures and 21 business days in Malawi. The nal� area coverscompliance with environmental regulations, which take two pro-cedures and ten days in Malawi if all goes well.
Figures I and II describe the number, time,and cost of theprocedures needed to begin operating legally in New Zealand andFrance, respectively. New Zealand’s streamlined start-up processtakes only three procedures and three days.The entrepreneurmust rst obtain approval for the company name from the web-�site of the Registrar of Companies,and then apply online forregistration with both the Registrar of Companies and the taxauthorities.
In contrast, the process in France takes 15 procedures and 53days.To begin, the founder needs to check the chosen companyname for uniqueness at the Institut National de la Proprie teIndustrielle (INPI). He then needs the mayor’s permit to use hishome as an ofce. (If the ofce is to be rented, the founder must� �secure a notarized lease agreement.) The following documentsmust then be obtained, each from a different authority: proof of a
F IGURE IStart-up Procedures in New Zealand
Procedures are lined up sequentially on the horizontal axis and described in thetext box. The time required to complete each procedure is described by the heightof the bar and measured against the left scale. Cumulative costs (as a percentageof per capita (GDP) are plotted using a line and measured against the right scale.
12 QUARTERLY JOURNAL OF ECONOMICS
clean criminal record,an original extract of the entrepreneur’scerticate of marital status from the City Hall,� and a power ofattorney. The start-up capital is then deposited with a notarybank or Caisse des Depots, and is blocked there until proof ofregistration is provided.Notarization of the Articles of Associa-tion follows. A notice stating the location of the headquartersofce is published in a journal approved for legal announcements,�and evidence ofthe publication is obtained.Next, the founderregisters four copies of the articles of association at the local taxcollection ofce. He then les a request for registration with the� �Centre de Formalites des Entreprises (CFE) which handles dec-larations of existence and other registration-related formalities.The CFE must process the documents or return them in case therequest is incomplete.The CFE automatically enters the com-pany information in the Registre Nationale des Entreprises(RNE) and obtains from the RNE identication numbers: numero�SIRENE (Syste`me Informatique pour le Repertoire des Entre-prises), numero SIRET (Syste` me Informatique pour le Re´pertoiredes Etablissements), and numero NAF (Nomenclature des Activi-tees Francaises).The SIRET is used by, among others,the tax
F IGURE IIStart-up Procedures in France
Procedures are lined up sequentially on the horizontal axis and described in thetext box. The time required to complete each procedure is described by the heightof the bar and measured against the left scale. Cumulative costs (as a percentageof per capita GDP) are plotted using a line and measured against the right scale.
13THE REGULATION OF ENTRY
authorities. The RNE also publishes a notice of the companyformation in the ofcial� bulletin of civil and commercial an-nouncements. The rm then obtains a proof of registration form�“K-bis,” which is effectively its identity card. To start legal opera-tions, the entrepreneur completes ve additional procedures: in-�form the post ofce of the new enterprise, designate a bondsman�or guarantee payment of taxes with a cash deposit,unblock thecompany’s capital by ling with the bank a proof of registration�(K-bis), have the rm’s ledgers and registers initialed, and le for� �social security. The magazine L’Entreprise comments: “To be surethat the le for the Company Registry is complete, many promot-�ers check it with a counselor’s service, which costs FF200 in Paris(about US$30). But there’s always something missing, and mostentrepreneurs end up using a lawyer to complete the procedure.”
III. BASIC RESULTS
Table II describes all the variables used in this study. TableIII presents the basic information from our sample. Countries areranked in ascending order rst� by the total number of entryprocedures,then by the time it takes to complete them, andnally by the cost of entry. We classify each procedure as one of�ve types:� safety and health, environmental,tax, labor, and aresidual category which we label “screening,” whose purpose un-der the public interest theory is to weed out the undesirableentrepreneurs. We then compute and report the total number ofprocedures and their breakdown into our ve categories for each�country.We also report the minimum number of business daysthat are ofcially required to comply with entry regulations, the�costs arising from the ofcial� fees, and the total costs whichimpute the entrepreneur’s time (as a fraction of GDP per capita).Finally, we take averages by income level and report t-testscomparing the regulation of entry across income groups.
The data show enormous variation in entry regulation acrosscountries. The total number of procedures ranges from 2 in Can-ada to 21 in the Dominican Republic and averages 10.48 for thewhole sample.Very few entry regulations cover tax and laborissues. The worldwide average number oflabor and tax proce-dures are 1.94 and 2.02, respectively. Procedures involving envi-ronmental issues and safety and health matters are even rarer(0.14 and 0.34 procedures on average, respectively).Instead,much of what governments do to regulate entry falls into the
14 QUARTERLY JOURNAL OF ECONOMICS
category of screening procedures. The worldwide average numberof such procedures facing a new entrant is 6.04.
The number of procedures is highly correlated with both thetime and cost variables (see Table VI). The correlation of the (log)number of procedures with (log) time is 0.83 and with (log) cost is0.64.Translated into economic terms, this means that entrepre-neurs pay a steep price in terms of fees and delays in countriesthat make intense use of ex ante screening.For example,com-pleting 19 procedures demands 149 business days and 111.5percent of GDP per capita in Mozambique. In Italy the completionof 16 procedures takes up 62 business days and 20 percent of GDPper capita. The Dominican Republic is in a class of its own:completing its 21 procedures requires 80 business days and feesof at least 4.63 times per capita GDP.These gures are admit-�tedly extreme within the sample,yet meeting the ofcial� entryrequirements in the average sample country requires roughly 47days and fees of 47 percent of GDP per capita.
When we aggregate time and out-of-pocket costs into anaggregate cost measure,the results for some countries becomeeven more extreme. The world average full cost measure rises to66 percent of per capita GDP, but varies from 1.7 percent of percapita GDP for New Zealand to 4.95 times per capita GDP in theDominican Republic.
Panel B of Table III reports averages of the total number ofprocedures and its components, time and cost by quartiles of percapita GDP in 1999. Two patterns emerge. First, the cost-to-per-capita-GDP ratio decreases uniformly with GDP per capita. Theaverage cost-to-per-capita-GDP ratio for countries in the topquartile of per capita GDP (“rich countries”)is 10 percent andrises to 108 percent in countries in the bottom quartile of percapita GDP. This pattern merely reects the fact that the income�elasticity of fees (in log levels) is about 0.2. Second, countries inthe top quartile of per capita GDP require fewer procedures andtheir entrepreneurs face shorter delays in starting a legal busi-ness than those in the remaining countries.7 The total number ofprocedures in an average rich country is 6.8 which is signicantly�lower than the rest-of-sample average of11.8 (t-statistics are
7. One objection to this nding is that entrepreneurs in rich countries might�face more postentry regulations than they do in poor countries. We have data onone aspect of postentry regulation, namely the regulation of labor markets (seeDjankov et al. [2001a]). The numbers of entry and of labor market regulations arepositively correlated across countries, contrary to this objection.
15THE REGULATION OF ENTRY
TABL
E II
THE
VARI
ABLE
STh
is ta
ble
desc
ribes
the
varia
bles
col
lect
ed fo
r the
85
coun
tries
inclu
ded
in o
ur st
udy.T
he rs
t col
umn
give
s the
nam
e of
�th
eva
riabl
e. T
he se
cond
col
umn
desc
ribes
the
varia
ble
and
prov
ides
the
sour
ces f
rom
whi
ch it
was
col
lect
ed.
Varia
ble
Desc
riptio
n
Num
ber o
fpr
oced
ures
The
num
ber o
f diff
eren
t pro
cedu
res t
hat a
sta
rt-up
has
to c
ompl
y wi
th in
ord
er to
obt
ain
a le
gal s
tatu
s, i.
e., t
o st
art o
pera
ting
as a
lega
l ent
ity. S
ourc
e:Au
thor
s’own
cal
cula
tions
.Sa
fety
& H
ealth
The
num
ber o
f diff
eren
t saf
ety
and
heal
th p
roce
dure
s tha
t a s
tart-
up h
as to
com
ply
with
to st
art o
pera
ting
as a
lega
l ent
ity. S
ourc
e: A
utho
rs’
own
calcu
latio
ns.
Envi
ronm
ent
The
num
ber o
f diff
eren
t env
ironm
enta
l pro
cedu
res t
hat a
sta
rt-up
has
to c
ompl
y wi
th to
star
t ope
ratin
g as
a le
gal e
ntity
. Sou
rce:
Auth
ors’o
wnca
lcula
tions
.Ta
xes
The
num
ber o
f diff
eren
t tax
pro
cedu
res
that
a st
art-u
p ha
s to
com
ply
with
to s
tart
oper
atin
g as
a le
gal e
ntity
.So
urce
: Aut
hors
’own
calcu
latio
ns.
Labo
rTh
e nu
mbe
r of d
iffer
ent l
abor
pro
cedu
res
that
a st
art-u
p ha
s to
com
ply
with
to st
art o
pera
ting
as a
lega
l ent
ity. S
ourc
e: A
utho
rs’
own
calcu
latio
ns.
Scre
enin
gTh
e nu
mbe
r of d
iffer
ent s
teps
that
a st
art-u
p ha
s to
com
ply
with
in o
rder
to o
btai
n a
regi
stra
tion
certi
cate
that
are
not
ass
ocia
ted
with
saf
ety
and
�he
alth
issu
es, t
he e
nviro
nmen
t, ta
xes,
or l
abor
. Sou
rce:
Aut
hors
’ow
n ca
lcula
tions
.Ti
me
The
time
it ta
kes t
o ob
tain
lega
l sta
tus
to o
pera
te a
rm,
�in
busin
ess d
ays.
A we
ek h
as v
e bu
sines
s day
s and
a m
onth
has
twen
ty-tw
o. S
ourc
e:�
Auth
ors’
own
calcu
latio
ns.
Cost
The
cost
of o
btai
ning
lega
l sta
tus t
o op
erat
e a
rm a
s a
shar
e of
per
cap
ita G
DP in
199
9. It
inclu
des
all i
dent
iabl
e of
cial e
xpen
ses (
fees
, cos
ts o
f�
��
proc
edur
es a
nd fo
rms,
phot
ocop
ies,
scal
stam
ps, l
egal
and
not
ary
char
ges,
�et
c.).
The
com
pany
is a
ssum
ed to
hav
e a
star
t-up
capi
tal o
f ten
tim
es p
erca
pita
GDP
in 1
999.
Sou
rce:A
utho
rs’o
wn ca
lcula
tions
.Co
st 1
time
The
cost
of o
btai
ning
lega
l sta
tus t
o op
erat
e a
rm a
s a
shar
e of
per
cap
ita G
DP in
199
9. It
inclu
des a
ll id
entia
ble
ofcia
l exp
ense
s (fe
es, c
osts
of
��
�pr
oced
ures
and
form
s, ph
otoc
opie
s, sc
al st
amps
, leg
al a
nd n
otar
y ch
arge
s,�
etc.
) as w
ell a
s the
mon
etize
d va
lue
of th
e en
trepr
eneu
r’s ti
me.
The
tim
e of
the
entre
pren
eur i
s val
ued
as th
e pr
oduc
t of t
ime
and
per c
apita
GDP
in 1
999
expr
esse
d in
per
bus
ines
s day
term
s. Th
e co
mpa
ny is
ass
umed
to h
ave
ast
art-u
p ca
pita
l of t
en ti
mes
the
GDP
per c
apita
leve
l in
1999
. Sou
rce:
Aut
hors
’ow
n ca
lcula
tions
.GD
P/PO
P 199
9Gr
oss
dom
estic
pro
duct
per
cap
ita in
cur
rent
U. S
. dol
lars
in 1
999.
Sou
rce:
Wor
ld B
ank
[200
1].
Qual
ity st
anda
rds
Num
ber o
f ISO
900
0 ce
rtica
tions
per
thou
sand
inha
bita
nts i
ssue
d by
the
Inte
rnat
iona
l Org
aniza
tion
for S
tand
ardi
zatio
n as
of 1
999
to e
ach
coun
try in
�th
e sa
mpl
e. “I
SO s
tand
ards
repr
esen
t an
inte
rnat
iona
l con
sens
us o
n th
e st
ate
of th
e ar
t in
the
tech
nolo
gy c
once
rned
. . .
. ISO
900
0 is
prim
arily
conc
erne
d wi
th q
ualit
y m
anag
emen
t. . .
.IS
O de
velo
ps v
olun
tary
tech
nica
l sta
ndar
ds th
at c
ontri
bute
to m
akin
g th
e de
velo
pmen
t,m
anuf
actu
ring
and
supp
ly o
f pro
duct
s an
d se
rvice
s mor
e ef
cient
,�
safe
r and
cle
aner
. . .
. ISO
stan
dard
s also
serv
e to
saf
egua
rd c
onsu
mer
s. .
. . W
hen
an o
rgan
izatio
n ha
s am
anag
emen
t sys
tem
cer
tied
to a
n IS
O 90
00. .
. , t
his m
eans
that
the
p�
roce
ss in
u�enc
ing
qual
ity (I
SO 9
000)
. . .
con
form
s to
the
rele
vant
stan
dard
’sre
quire
men
ts.”
Sour
ce: I
nter
natio
nal O
rgan
izatio
n fo
r Sta
ndar
diza
tion
(www
.iso.
ch).
Wat
er p
ollu
tion
Emiss
ions
of o
rgan
ic wa
ter p
ollu
tant
s (k
ilogr
ams p
er d
ay p
er w
orke
r) fo
r 199
8. M
easu
red
in te
rms
of b
ioch
emica
l oxy
gen
dem
and,
which
refe
rs to
the
amou
nt o
f oxy
gen
that
bac
teria
in w
ater
will
cons
ume
in b
reak
ing
down
was
te. E
miss
ions
per
wor
ker a
re to
tal e
miss
ions
div
ided
by
the
num
ber o
fin
dust
rial w
orke
rs. S
ourc
e:Wor
ld B
ank
[200
1].
16 QUARTERLY JOURNAL OF ECONOMICS
Deat
hs fr
omac
ciden
tal
poiso
ning
Log
of th
e nu
mbe
r of d
eath
s cau
sed
by a
ccid
enta
l poi
soni
ngs (
inclu
ding
by
drug
s, m
edica
tions
, bio
-pro
duct
s, so
lid a
nd li
quid
sub
stan
ces,
gase
s and
vapo
rs) p
er m
illio
n in
habi
tant
s. Av
erag
e of
the
year
s 198
1 th
roug
h 19
94 (t
he m
ost r
ecen
t ava
ilabl
e gu
re).
�Sour
ce: T
he n
umbe
r of a
ccid
enta
l dea
ths
from
poi
soni
ng is
take
n fro
m W
orld
Hea
lth O
rgan
izatio
n [1
998]
.Po
pula
tion
gure
s ar
e ta
ken
from
Wor
ld B
ank
[200
1].
�De
aths
from
inte
stin
alin
fect
ions
Log
of th
e nu
mbe
r of d
eath
s cau
sed
by in
test
inal
infe
ctio
ns (i
nclu
ding
dig
estiv
e di
sord
ers)
per
milli
on in
habi
tant
s. Av
erag
e of
the
year
s 198
1 th
roug
h19
94 (t
he m
ost r
ecen
t ava
ilabl
e gu
re).
�So
urce
: The
num
ber o
f dea
ths f
rom
inte
stin
al in
fect
ions
is ta
ken
from
Wor
ld H
ealth
Org
aniza
tion
[199
8].
Popu
latio
n gu
res a
re ta
ken
from
Wor
ld B
ank
[200
1].
�Si
ze o
f the
uno
fcia
l�
econ
omy
Size
of t
he s
hado
w ec
onom
y as
a p
erce
ntag
e of
GDP
(var
ying
tim
e pe
riods
). So
urce
:Au
thor
s’own
com
puta
tions
bas
ed o
n av
erag
ing
over
all
estim
ates
repo
rted
in S
chne
ider
and
Ens
te [2
000]
for a
ny g
iven
cou
ntry
as
well
as S
anan
ikon
e [1
996]
for B
urki
na F
aso,
Chi
dzer
o [1
996]
for S
eneg
al, T
urnh
aman
d Sc
hwar
tz [1
990]
for I
ndon
esia
and
Pak
istan
, and
Kas
nako
glu
and
Yayl
a [2
000]
for T
urke
y.Em
ploy
men
t in
the
unof
cial e
cono
my
�Sh
are
of th
e la
bor f
orce
em
ploy
ed in
the
unof
cial e
cono
my
in th
e ca
pita
l city
of e
ach
coun
try a
s a p
erce
nt o
f the
ofc
ial l
abor
.�
�Fi
gure
s ar
e ba
sed
onsu
rvey
s and
, for
som
e co
untri
es,on e
cono
met
ric e
stim
ates
. Sou
rce:
Sch
neid
er [2
000]
and
the
Glob
al U
rban
Indi
cato
rs D
atab
ase
[200
0](w
ww.u
rban
obse
rvat
ory.
org/
indi
cato
rs/d
atab
ase)
.Pr
oduc
t mar
ket
com
petit
ion
Surv
ey m
easu
re o
f the
ext
ent t
o wh
ich re
spon
dent
s agr
ee w
ith th
e fo
llowi
ng s
tate
men
t:“C
ompe
titio
n in
the
loca
l mar
ket i
s int
ense
and
mar
ket s
hare
suc
tuat
e co
nsta
ntly
.” Sc
ale
from
1 (s
trong
ly d
isagr
ee) t
hrou
gh 7
(stro
ngly
agr
ee).
Sour
ce: I
MD
[200
1].
�Co
rrupt
ion
Corru
ptio
n pe
rcep
tion
inde
x fo
r 199
9.Corru
ptio
n is
dene
d br
oadl
y as
“th
e m
isuse
of p
ublic
pow
er fo
r priv
ate
bene
ts,
��e.g.
,brib
ing
of p
ublic
ofc
ials,
�ki
ckba
cks i
n pu
blic
proc
urem
ent,
or e
mbe
zzle
men
t of p
ublic
fund
s.” T
he in
dex
aver
ages
the
corru
ptio
n sc
ores
giv
en b
y th
e fo
llowi
ng so
urce
s: (1
)Fr
eedo
m H
ouse
Nat
ions
in T
rans
it (F
H); (
2) G
allu
p In
tern
atio
nal (
GI);
(3) t
he E
cono
mist
Inte
lligen
ce U
nit (
EIU)
; (4)
the
Inst
itute
for M
anag
emen
tDe
velo
pmen
t,Lau
sann
e (IM
D);(5
) the
Inte
rnat
iona
l Crim
e Vi
ctim
Sur
vey
(ICVS
);(6) t
he P
oliti
cal a
nd E
cono
mic
Risk
Con
sulta
ncy,Ho
ng K
ong
(PER
C); (
7) T
he W
all S
treet
Jour
nal,C
entra
l Eur
opea
n Ec
onom
ic Re
view
(CEE
R); (
8) th
e W
orld
Ban
k an
d Un
iver
sity
of B
asel
(WB/
UB),
(9) t
he W
orld
Econ
omic
Foru
m (W
EF).
Desc
endi
ng sc
ore
from
1 (m
ost c
orru
pt) t
o 10
(lea
st c
orru
pt).
Sour
ce: T
rans
pare
ncy
Inte
rnat
iona
l (ww
w.tra
nspa
renc
y.de
/).Ex
ecut
ive
de fa
cto
inde
pend
ence
Inde
x of
“ope
ratio
n (d
e fa
cto)
inde
pend
ence
of c
hief
exe
cutiv
e.” D
esce
ndin
g sc
ale
from
1 to
7 (1
5pu
re in
divi
dual
; 2 5
inte
rmed
iate
cat
egor
y; 3
5slig
ht to
mod
erat
e lim
itatio
ns; 4
5inte
rmed
iate
cat
egor
y; 5
5subs
tant
ial l
imita
tions
; 6 5i
nter
med
iate
cat
egor
y; 7
5exe
cutiv
e pa
rity
or su
bord
inat
ion)
.Av
erag
e of
the
year
s 19
45 th
roug
h 19
98. S
ourc
e: Ja
gger
s and
Mar
shal
l [20
00].
Cons
train
ts o
nex
ecut
ive
powe
rIn
dex
of c
onst
rain
ts o
n th
e ex
ecut
ive
powe
r bas
ed o
n th
e nu
mbe
r of e
ffect
ive
veto
poi
nts i
n a
coun
try. V
eto
poin
ts in
clude
(1) a
n eff
ectiv
e le
gisla
ture
(repr
esen
ts tw
o ve
to p
oint
s in
the
case
of b
icam
eral
syst
ems)
; (2)
an
inde
pend
ent j
udici
ary;
and
(3) a
stro
ng fe
dera
l sys
tem
. Ave
rage
of t
he y
ears
194
5th
roug
h 19
98. S
ourc
e: H
enisz
[200
1].
Effec
tiven
ess
ofle
gisla
ture
Inde
x of
the
effec
tiven
ess o
f the
legi
slatu
re.
Asce
ndin
g sc
ale
from
1 to
4 (1
5no le
gisla
ture
;2 5
larg
ely
ineff
ectiv
e; 3
5par
tly e
ffect
ive;
4 5e
ffect
ive)
.Av
erag
e of
the
year
s 19
45 th
roug
h 19
98. S
ourc
e: T
he C
ross
-Nat
iona
l Tim
e-Se
ries
Data
Arc
hive
(www
.dat
aban
ks.si
teho
stin
g.ne
t/www
/mai
n.ht
m).
Com
petit
ion
in th
ele
gisla
ture
’sno
min
atin
g pr
oces
sInde
x of
the
com
petit
iven
ess
of th
e no
min
atin
g pr
oces
s for
sea
ts in
the
legi
slatu
re. A
scen
ding
scal
e fro
m 1
to 4
(1 5
no le
gisla
ture
; 2 5
nonc
ompe
titiv
e;3
5pa
rtly
com
petit
ive;
4 5c
ompe
titiv
e). A
vera
ge o
f the
yea
rs 1
945
thro
ugh
1998
.So
urce
: The
Cro
ss-N
atio
nal T
ime-
Serie
s Dat
a Ar
chiv
e(w
ww.d
atab
anks
.site
host
ing.
net/w
ww/m
ain.
htm
).Au
tocr
acy
Indi
cate
s the
“gen
eral
clo
sedn
ess o
f pol
itica
l ins
titut
ions
.” S
cale
from
0 to
10
with
0 b
eing
low
in a
utoc
racy
and
10
bein
g hi
gh in
aut
ocra
cy. A
vera
ge o
f the
year
s 19
45 th
roug
h 19
98.So
urce
: Jag
gers
and
Mar
shal
l [20
00].
Polit
ical r
ight
sIn
dex
of p
oliti
cal r
ight
s. H
ighe
r rat
ings
indi
cate
cou
ntrie
s tha
t com
e clo
ser t
o th
e id
eals
sugg
este
d by
the
chec
klist
que
stio
ns o
f (1)
free
and
fair
elec
tions
; (2)
thos
e el
ecte
d ru
le; (
3) th
ere
are
com
petit
ive
parti
es o
r oth
er c
ompe
titiv
e po
litica
l gro
upin
gs; (
4) th
e op
posit
ion
has a
n im
porta
nt ro
le a
nd p
ower
; and
(5) t
heen
titie
s hav
e se
lf-de
term
inat
ion
or a
n ex
trem
ely
high
deg
ree
of a
uton
omy.
Ave
rage
of t
he y
ears
197
2 th
roug
h 19
98. S
ourc
e: F
reed
om H
ouse
[200
1].
Lega
l orig
inId
entie
s the
lega
l orig
in o
f eac
h Co
mpa
ny L
aw o
r Com
mer
cial C
ode
of e
ach
coun
try.
�Th
ere
are
ve p
ossib
le o
rigin
s:�
(1) E
nglis
h Co
mm
on L
aw;(2
)Fr
ench
Com
mer
cial C
ode;(3
) Ger
man
Com
mer
cial C
ode;(4
) Sca
ndin
avia
n Co
mm
ercia
l Cod
e; a
nd (5
) Soc
ialis
t/Com
mun
ist la
ws. S
ourc
e:La
Por
ta e
t al.
[199
8];R
eyno
lds a
nd F
lore
s [19
89];
CIA
Wor
ld F
actb
ook
[200
1].
17THE REGULATION OF ENTRY
TABL
E III
THE
DATA
Pane
lA re
ports
the
tota
lnu
mbe
r ofp
roce
dure
s and
thei
r bre
akup
in th
e fo
llowi
ng v
e ca
tego
ries:
�(1
)saf
ety
and
heal
th;(
2)en
viro
nmen
t;(3)
taxe
s;(4)
labo
r;an
d (5
) scr
eeni
ng.Th
e ta
ble
also
repo
rts th
e tim
e,dire
ct c
ost (
as a
frac
tion
of G
DP p
er c
apita
in19
99) a
ssoc
iate
d wi
th m
eetin
g go
vern
men
t req
uire
men
ts,
and
dire
ct c
ost p
lus t
he m
onet
ized
valu
e of
the
entre
pren
eur’s
tim
e (a
s afra
ctio
n of
GDP
per
cap
ita in
199
9) a
s wel
l as t
he le
vel o
f GDP
per
cap
ita in
dol
lars
in 1
999.
Cou
ntrie
s are
sorte
d in
asc
endi
ng o
rder
on th
e ba
sis o
f(1)
the
tota
lnum
ber o
fpro
cedu
res;(
2) ti
me;
and
(3)c
ost.
Pane
lB p
rese
nts m
eans
of t
he v
aria
bles
by
quar
tiles
of
GDP
per c
apita
in 1
999.
Pane
lC p
rese
nts t
-sta
tistic
s for
diff
eren
ces i
n m
eans
acr
oss q
uarti
les o
f per
cap
ita G
DP in
199
9.Tabl
e II
desc
ribes
the
varia
bles
in d
etai
l.
Num
ber o
fpr
oced
ures
Safe
ty &
Heal
thEn
viro
nmen
tTa
xes
Labo
rSc
reen
ing
Tim
eCo
stCo
st 1
time
GDP/
POP 1
999
Pane
l A:D
ata
Cana
da2
00
10
12
0.01
450.
0225
19,3
20Au
stra
lia2
00
10
12
0.02
250.
0305
20,0
50Ne
w Ze
alan
d3
00
10
23
0.00
530.
0173
13,7
80De
nmar
k3
00
10
23
0.10
000.
1120
32,0
30Ire
land
30
01
02
160.
1157
0.17
9719
,160
Unite
d St
ates
40
01
12
40.
0049
0.01
6930
,600
Norw
ay4
00
11
218
0.04
720.
1192
32,8
80Un
ited
King
dom
50
01
13
40.
0143
0.03
0322
,640
Hong
Kon
g5
00
01
415
0.03
330.
0933
23,5
20M
ongo
lia5
00
10
422
0.03
310.
1211
350
Finl
and
50
01
31
240.
0116
0.10
7623
,780
Israe
l5
00
21
232
0.21
320.
3412
15,8
60Zi
mba
bwe
50
02
12
470.
1289
0.31
6952
0Sw
eden
60
01
14
130.
0256
0.07
7625
,040
Jam
aica
60
02
13
240.
1879
0.28
392,
330
Zam
bia
60
02
13
290.
6049
0.72
0932
0Pa
nam
a7
00
11
515
0.30
740.
3674
3,07
0Sw
itzer
land
70
02
14
160.
1724
0.23
6438
,350
Sing
apor
e7
00
12
422
0.11
910.
2071
29,6
10La
tvia
70
02
14
230.
4234
0.51
542,
470
Mal
aysia
70
01
15
420.
2645
0.43
253,
400
18 QUARTERLY JOURNAL OF ECONOMICS
Sri L
anka
80
01
16
230.
1972
0.28
9282
0Ne
ther
land
s8
01
20
531
0.18
410.
3081
24,3
20Be
lgiu
m8
00
12
533
0.09
980.
2318
24,5
10Ta
iwan
, Chi
na8
00
12
537
0.06
600.
2140
13,2
48Hu
ngar
y8
00
11
639
0.85
871.
0147
4,65
0Pa
kist
an8
00
21
550
0.34
960.
5496
470
Peru
80
02
24
830.
1986
0.53
062,
390
Sout
h Af
rica
90
02
25
260.
0844
0.18
843,
160
Kyrg
yz R
epub
lic9
00
11
732
0.25
320.
3812
300
Thai
land
90
03
24
350.
0639
0.20
391,
960
Nige
ria9
01
21
536
2.57
002.
7140
310
Aust
ria9
00
21
637
0.27
280.
4208
25,9
70Tu
nisia
90
00
27
410.
1722
0.33
622,
100
Slov
enia
90
00
18
470.
2103
0.39
839,
890
Leba
non
90
01
17
631.
5672
1.81
923,
700
Urug
uay
100
01
45
230.
4949
0.58
695,
900
Bulg
aria
100
02
08
270.
1441
0.25
211,
380
Chile
100
03
25
280.
1308
0.24
284,
740
Germ
any
100
01
27
420.
1569
0.32
4925
,350
Ghan
a10
01
14
445
0.21
750.
3975
390
Lithu
ania
102
02
15
460.
0546
0.23
862,
620
Czec
h Re
publ
ic10
00
12
765
0.08
220.
3422
5,06
0In
dia
100
03
34
770.
5776
0.88
5645
0Ja
pan
110
02
27
260.
1161
0.22
0132
,230
Ugan
da11
20
21
629
0.30
400.
4200
320
Egyp
t, Ar
ab R
ep.
110
02
18
510.
9659
1.16
991,
400
Keny
a11
00
23
654
0.50
700.
7230
360
Arm
enia
110
01
19
550.
1267
0.34
6749
0Po
land
112
03
15
580.
2546
0.48
663,
960
Spai
n11
00
42
582
0.17
300.
5010
14,0
00In
done
sia11
00
21
812
80.
5379
1.04
9958
0Cr
oatia
121
02
36
380.
4503
0.60
234,
580
Kaza
khst
an12
00
13
842
0.47
470.
6427
1,23
0Po
rtuga
l12
00
22
876
0.18
440.
4884
10,6
00Sl
ovak
Rep
ublic
120
02
37
890.
1452
0.50
123,
590
Chin
a12
00
52
592
0.14
170.
5097
780
19THE REGULATION OF ENTRY
TABL
E III
(CON
TINU
ED)
Num
ber o
fpr
oced
ures
Safe
ty &
Heal
thEn
viro
nmen
tTa
xes
Labo
rSc
reen
ing
Tim
eCo
stCo
st 1
time
GDP/
POP 1
999
Kore
a,Re
p.13
00
24
727
0.16
270.
2707
8,49
0Ta
nzan
ia13
10
52
529
3.35
203.
4680
240
Ukra
ine
130
02
38
300.
2569
0.37
6975
0Tu
rkey
130
02
29
440.
1932
0.36
922,
900
Mal
awi
135
21
14
520.
1886
0.39
6619
0M
oroc
co13
10
33
657
0.21
260.
4406
1,20
0Ge
orgi
a13
20
11
969
0.60
480.
8808
620
Burk
ina
Faso
140
03
29
333.
1883
3.32
0324
0Ph
ilippi
nes
140
05
18
460.
1897
0.37
371,
020
Arge
ntin
a14
00
45
548
0.10
190.
2939
7,60
0Jo
rdan
141
02
110
640.
5369
0.79
291,
500
Vene
zuel
a14
11
33
610
40.
1060
0.52
203,
670
Gree
ce15
00
42
936
0.58
600.
7300
11,7
70Fr
ance
150
03
111
530.
1430
0.35
5023
,480
Braz
il15
00
75
363
0.20
140.
4534
4,42
0M
exico
151
22
37
670.
5664
0.83
444,
400
Mal
i16
10
32
1059
240
Italy
160
05
38
620.
2002
0.44
8219
,710
Sene
gal
160
03
211
691.
2331
1.50
9151
0Ec
uado
r16
20
24
872
0.62
230.
9103
1,31
0Ro
man
ia16
12
13
997
0.15
310.
5411
1,52
0Vi
etna
m16
01
15
911
21.
3377
1.78
5737
0M
adag
asca
r17
00
73
715
20.
4263
1.03
4325
0Co
lom
bia
182
04
57
480.
1480
0.34
002,
250
Moz
ambi
que
194
01
311
149
1.11
461.
7106
230
Russ
ian
Fede
ratio
n20
00
25
1357
0.19
790.
4259
2,27
0Bo
livia
200
12
710
882.
6558
3.00
781,
010
Dom
inica
n Re
publ
ic21
00
23
1680
4.63
094.
9509
191
Sam
ple
aver
age
10.4
80.
340.
142.
041.
946.
0447
.40
0.47
080.
6598
8,22
6
20 QUARTERLY JOURNAL OF ECONOMICS
Pane
l B:M
eans
by
Quar
tiles
of G
DP p
er c
apita
in 1
999
1stQu
artil
e6.
770.
000.
051.
591.
144.
0024
.50
0.10
0.20
24,3
722nd
Quar
tile
11.1
00.
240.
142.
142.
386.
1949
.29
0.33
0.53
5,84
73rd
Quar
tile
12.3
30.
520.
142.
192.
337.
1453
.10
0.41
0.62
1,56
84th
Quar
tile
11.9
00.
620.
242.
241.
956.
9063
.76
1.08
1.34
349
Pane
l C: T
est o
f mea
ns (t
-sta
tistic
s)
1stvs
. 2nd
Quar
tile
24.2
0a22
.07b
20.8
721
.35
23.6
4a2
3.34
a23
.71a
23.
03a
23.
97a
12.0
3a
1stvs
. 3rd
Quar
tile
24.5
8a23
.02a
20.8
721
.64b
22.8
2a2
4.07
a24
.21a
22.
54b
23.
19a
16.3
5a
1stvs
. 4th
Quar
tile
24.0
4a22
.08a
21.5
521
.61
22.4
3b2
3.18
a24
.09a
23.
53a
24.
06a
17.3
1a
2ndvs
.3rd
Quar
tile
21.1
721
.34
0.00
20.1
10.
102
1.51
20.5
42
0.52
20.
596.
14a
2ndvs
.4th
Quar
tile
20.7
221
.17
20.6
120
.21
1.10
20.
8921
.46
22.
54b
22.
73a
8.05
a
3rdvs
.4th
Quar
tile
0.33
20.2
720
.61
20.1
10.
820.
2621
.06
22.
17b
22.
27b
8.53
a
a. S
igni
cant
at 1
per
cent
;�
b. s
igni
cant
at 5
per
cent
; c. s
igni
cant
at 1
0 pe
rcen
t.�
�
21THE REGULATION OF ENTRY
reported in Panel C). Rich countries also have fewer safety andhealth, tax, and labor start-up procedures than the rest ofthesample.Similarly, meeting government requirements takes ap-proximately 24.5 business days in rich countries, statisticallysignicantly lower than the rest-of-sample mean of 55.4 days. In�contrast, countries in the other three quartiles of per capitaincome are not statistically different from each other in the num-ber of procedures and the time it takes to complete them.
To summarize, the regulation of entry varies enormouslyacross countries. It often takes the form of screening procedures.Rich countries (i.e., those in the top quartile of per capita GDP)regulate entry relatively less than do all the other countries. Inprinciple, these ndings are consistent with both the public choice�and public interest theories. Market failures might be more per-vasive in countries with incomes just below the rst quartile of�GDP per capita, generating a greater demand for benign regula-tion in these countries. Alternatively, income levels may proxy forcharacteristics ofpolitical systems that allow politicians or in-cumbent rms to capture the regulatory process for their own�benet. In the next two sections we relate these patterns in the�data to the theories of regulation.
IV. WHO GETS THE RENTS FROM REGULATION ?Theories of regulation differ in their predictions as to who
gets its benets. The public interest theory predicts that stricter�entry regulation is associated with higher measured consumerwelfare. In contrast, the public choice theory sees regulation as atool to create rents for bureaucrats or incumbent rms. Stricter�regulation should then be associated with higher corruption andless competition.
Measuring rents is inherently extremely difcult, especially�across countries. In this section, we present some measures thatwe have been able to nd that bear—albeit quite imperfectly— on�the relevant theories. To begin, consider some variables bearingon the public interest theory. These variables reect the activities�of all rms in the country, and not just the entrants. The rst is� �a measure of a country’s compliance with international qualitystandards. It is a natural variable to focus on if the goal ofregulation is to screen out entrants who might sell output ofinferior quality. Second, we consider the level of water pollution,which should fall if entry regulation aims to control externalities
22 QUARTERLY JOURNAL OF ECONOMICS
and does so successfully.8 Third, we consider two measures ofhealth outcomes that publicly interested entry regulation wouldguard against:the number of deaths from accidentalpoisoningand from intestinal infections.9 In addition, we include two mea-sures of the size of the unofcial economy based on estimates of�unofcial� output and employment,respectively.Since rms op-�erating unofcially avoid nearly all regulations, a large size of the�unofcial� economy in countries with more regulations under-mines the prediction of the public interest theory that regulationeffectively protects consumers.10 Finally, we use a survey mea-sure of “productmarket competition.” Stiffer entry regulationshould be associated with greater competition in the public inter-est theory,and lacking competition in the public choice theory,especially in its regulatory capture version.
Table IV presents the results on these seven measures ofconsequences ofregulation using the number of procedures asdependent variables.For two reasons, we run each regressionwith and without the log of per capita GDP. First, the number ofprocedures is correlated with income per capita, and we want tomake sure that we are not picking up the general effects of goodgovernance associated with higher income. Second, we use GDPper capita as a rough proxy of the prevalence of market failures ina country. Including per capita income as a control is a crude wayto keep the need for socially desirable regulation constant, whichallows us to focus on the consequences (and later causes) ofregulation separately from the need.
The results in Table IV show that compliance with interna-tional quality standards declines as the number ofproceduresrises. Pollution levels do not fall with regulation levels. The twomeasures of accidental poisoning are not lower in countries withmore regulations (if anything, the opposite seems to be true evencontrolling for per capita income). More regulation is associatedwith a larger unofcial economy, and statistically signicantly so� �if we use the unofcial� employmentvariable. Competition incountries with more regulation is perceived to be less intense,
8. We have tried measures of air pollution and obtained similar results.9. Due to reporting practices in poor countries,the second variable might
better capture deaths from accidental poisoning in the poor countries, according tothe World Health Organization [1998].
10. There is a large literature detailing how regulation can drive rms into�the unofcial economy, where they can avoid some or all of these regulations. See,�for example,Johnson, Kaufmann, and Shleifer [1997] and Friedman,Johnson,Kaufmann, and Zoido-Lobaton [2000].
23THE REGULATION OF ENTRY
TABLE IVEVIDENCE ON REGULATION AND SOCIAL OUTCOMES
The table presents the results of OLS regressions using the followingseven dependent variables:(1) Quality standards as proxied by the numberof ISO 9000 certications;� (2) Water pollution; (3) Deaths from accidentalpoisoning; (4) Deaths from intestinal infection; (5) Size of the unofcial�economy as a fraction of GDP; (6) Employment in the unofcial� economy;and (7) Product market competition. The independent variables are the logof the number of procedures and the log of per capita GDP in dollars in1999. Table II describes all variables in detail. Robust standard errors areshown below the coefcients.�
Dependent variableNumber ofprocedures
LnGDP/POP 1999 Constant
R2
N
Quality standards (ISOCertications)�
2 0.2781a 0.7649a 0.3311(0.0496) (0.1268) 85
2 0.1595a 0.0771a 2 0.1140 0.5384(0.0443) (0.0131) (0.1484) 85
Water pollution 0.0127b 0.1557a 0.0247(0.0084) (0.0174) 76
2 0.0037 2 0.0131a 0.2984a 0.2310(0.0076) (0.0027) (0.0314) 76
Deaths from accidentalpoisoning 0.6588a 1.6357a 0.1179
(0.2057) (0.4381) 570.0637 2 0.4525a 6.8347a 0.4109
(0.1958) (0.0933) (1.0929) 57
Deaths from intestinal infection 2.3049a 2 2.2697a 0.3451(0.3081) (0.6778) 611.0501a 2 0.8717a 7.8494a 0.6259
(0.2971) (0.1012) (1.3048) 61
Size of the unofcial economy� d 14.7553a 2 3.7982 0.2482(2.5698) (5.2139) 736.4849b 2 6.1908a 67.1030a 0.5187
(2.5385) (1.0834) (13.7059) 73
Employment in the unofcial�economy
19.4438a 2 4.1103 0.3132(2.5756) (5.9160) 4613.8512a 2 4.4585a 41.5133b 0.44772 3.6056 (1.3918) (17.6836) 46
Product market competition 2 0.4012a 5.7571a 0.1405(0.1213) (0.2511) 54
2 0.1418 0.2108a 3.3579a 0.3087(0.1202) (0.0680) (0.7749) 54
a. Signicant at 1 percent; b. signicant at 5 percent; c. signicant at 10 percent.� � �d. The regression on the size ofthe unofcial� economy controls for the log ofGDP per capita plus
unofcial economy income (i.e., GDP per capita* (1� 1unofcial economy)) and not just by GDP per capita as�all other regressions on the table do.
24 QUARTERLY JOURNAL OF ECONOMICS
although this result is only statistically signicant without the�income control. We have also run all regressions using cost andtime as independent variables, and obtained qualitatively similarresults. While the data are noisy, none of the results support thepredictions of the public interest theory.11
The negative results in Table IV should be interpreted withcaution. First, some of our measures of public goods,such asdeaths from accidental poisoning, are probably more relevant forpoor countries, and in particular are unlikely to be inuenced by�entry regulation for rich countries. Accordingly, it might be moreappropriate to perform the analysis separately for countries atdifferent income levels. To this end, we divide the sample at themedian per capita income and rerun the regressions in Table IVfor each subsample. The data do not support the proposition that,in the subsample of poorer countries, heavier regulation of entryis associated with better social outcomes or more competition.
Second, an even deeper concern with the results in Table IVis that, despite our control for per capita income, there is impor-tant unobserved heterogeneity among countries correlated withregulation, which accounts for the results. For example, supposethat some countries have particularly egregious market failures,but also especially poor alternative mechanisms for dealing withthem, such as the press and the courts. Regulation, for example,might be less infected by corruption than either the press or thejudiciary. A publicly interested regulator in such countries wouldchoose to use more regulatory procedures because the alternativemethods of dealing with market failure are even worse, but stillend up with inferior outcomes.
We cannot dismiss this concern with the results of Table IV,although our later ndings cast doubt on its validity. We run the�regressions in Table IV using information on the freedom of thepress from Djankov,McLiesh, Nenova, and Shleifer [2001],andnd that,� holding constant various measures offreedom ofthepress and per capita income, the number of procedures is still notassociated with superior social outcomes. We also run the regres-sions in Table IV using a number of measures of citizen access to
11. Using data for publicly traded rms,� we have found no evidence thatcountries with heavier entry regulation have more protable rms, as measured� �by the return on assets. These protability numbers, however, are very crude. We�also measured protability using the return on World-Bank-nanced projects� �from the World Bank Operations Evaluation Department. These data also yieldno evidence that more regulations are associated with greater returns.
25THE REGULATION OF ENTRY
justice and of efciency of� the judiciary from Djankov et al.[2001b].Again, we nd that,� holding constant these measuresand per capita income, the number of procedures is associated, ifanything, with inferior social outcomes.
A direct implication of the tollboothhypothesis is that cor-ruption levels and the intensity of entry regulation are positivelycorrelated. In fact,since in many countries in our sample politi-cians run businesses, the regulation of entry produces the doublebenet of corruption revenues and reduced competition for the�incumbent businesses already afliated with the politicians. Fig-�ure III presents the relationship between corruption and thenumber of procedures without controlling for per capita GDP.12
Panel A of Table V shows statistically that,consistent with thetollbooththeory, more regulation is associated with worse corrup-tion scores. The coefcients are statistically signicant (with and� �without controlling for income) and large in economic terms. Theestimated coefcients imply that, controlling for per capita GDP,�reducing the number ofprocedures by ten is associated with a
12. We have tried a number of measures of corruption,all yielding similarresults. We have made sure that our results do not depend on “red tape” being partof the measure of corruption.
F IGURE IIICorruption and Number of Procedures
The scatter plot shows the values of the corruption index against the (log)number of procedures for the 78 countries in our sample with nonmissing data oncorruption.
26 QUARTERLY JOURNAL OF ECONOMICS
reduction in corruption of .8 of a standard deviation, roughly thedifference between France and Italy.The results using the costand the time of meeting the entry regulations as independent
TABLE VEVIDENCE ON THE TOLLBOOTH THEORY
The table presents the results of OLS regressions using corruption as thedependent variable. The independent variables are (1) the log of the numberof procedures;(2) the log of time; (3) the log of cost;and the log of per capitaGDP in dollars in 1999. Panel A presents results for the 78 observationswith available corruption data. Panel B reports results separately for thesubsample of countries with GDP per capita in 1999 above and below thesample median. Table II describes all variables in detail. Robust standarderrors are shown in parentheses below the coefcients.�
Panel A: Results for the whole sample
Independentvariable (1) (2) (3) (4) (5) (6)
Number ofprocedures
2 3.1811a 2 1.8654a(0.2986) (0.2131)
Time 2 1.7566a 2 0.8854a(0.1488) (0.1377)
Cost 2 1.2129a 2 0.4978a(0.1206) (0.1285)
Ln GDP/POP 1999 0.9966a 0.9765a 0.9960a(0.0864) (0.1014) (0.1118)
Constant 11.8741a 1.1345 11.0694a 0.0677 2.7520a 2 4.0893a(0.7380) (0.9299) (0.5932) (1.1176) (0.2414) (0.7867)
R2 0.4656 0.8125 0.4387 0.7662 0.4256 0.7306N 78 78 78 78 78 78
Panel B: Results for countries above and below the world median GDP per capita
Countries abovemedian GDP/POP1999
Countries belowmedian GDP/POP1999
Independentvariable (1) (2) (3) (4) (5) (6)
Number ofprocedures
2 1.8729a 2 0.7841b(0.2971) (0.3304)
Time 2 0.8135a 2 0.0923(0.1762) (0.2850)
Cost 2 0.5327a 2 0.3408a(0.1894) (0.1021)
Ln GDP/POP 1999 1.4811a 1.5871a 1.7621a 0.3993b 0.3680c 0.2117(0.2265) (0.2789) (0.2913) (0.1735) (0.1802) (0.1718)
Constant 2 3.6970 2 5.9027c 2 11.3736a 2.3246c 1.0098 1.3125(2.4628) (2.9942) (2.5773) (1.2849) (1.8813) (1.1136)
R2 0.7820 0.7155 0.6728 0.2362 0.1324 0.2830N 40 40 40 38 38 38
a. Signicant at 1 percent; b. signicant at 5 percent; c. signicant at 10 percent.� � �
27THE REGULATION OF ENTRY
variables are also statistically signicant, pointing further to the�robustness of this evidence in favor of the tollbooth theory.
One way to reconcile the ndings in Table V with the public�interest theory is to argue that regulation has unintended conse-quences.Thus, benign politicians in emerging markets imitatethe regulations of rich countries with best intentions in mind, butare stymied by corruption and other enforcement failures.Thistheory is not entirely consistent with our earlier nding that�poorer countries in fact have more entry regulations than richcountries do.A further implication of this theory is that regula-tions should have a bigger impact on corruption in poorer coun-tries. Panel B of Table V addresses this hypothesis by examiningseparately the relationship between entry regulations and cor-ruption in countries with above and below world median income.The results show that regulations actually have a stronger effecton corruption in the subsample of richer countries.
On the second version of the unintended consequences argu-ment, it may be impossible for a benevolent government to screenbad entrants without facilitating corruption [Banerjee 1997; Ace-moglu and Verdier 2000]. In countries whose markets are fraughtwith failures, it might be better to have corrupt regulators thannone at all. Corruption may be the price to pay for addressingmarket failures. We turn next to the evidence regarding thepolitical attributes of countries that regulate entry to disentanglethe competing theories of regulation.
V. WHO REGULATES ENTRY ?In this section we focus on the political attributes of countries
that regulate entry. These attributes are intimately related to thecompeting hypotheses aboutregulation. In the public interesttheory, regulation remedies market failures.The implication isthat countries whose political systems are characterized byhigher congruence between policy outcomes and socialprefer-ences should regulate entry more strictly. In the empirical analy-sis that follows, we identify such countries with more represen-tative and limited governments.
In the public choice theory, despotic regimes are more likelyto be captured by incumbents and to have regulatory systemsaimed at maximizing the bribes and prots of a few cronies rather�than address market failures [Olson 1991; De Long and Shleifer1993]. Such dictators need the political support of various inter-
28 QUARTERLY JOURNAL OF ECONOMICS
est groups,and use distortionary policies to favor their friendsand to abuse their opponents. The dictator’s choice of distortion-ary policies is not mitigated by public pressure, since he faces noelections. When the public is less able to assert its preferences,then, we expect more distortionary policy choices. Specically, we�expect more representative and limited government to be associ-ated with lighter regulation of entry.
One might argue,in contrast, that dictators should pursueefcient economic policies,� including light regulation of entry, ifthey are politically secure and can “tax” the fruits of entry andgrowth. One response,discussed by Olson [1991]and De Longand Shleifer [1993],is that while a few dictators are politicallysecure and pursue enlightened policies,most are not. Insecuredictators extract what they can from the economy as fast as theycan both to prolong their tenure,and to enrich themselves andtheir supporters while still in power. Democracy might notlengthen the horizons of politicians, but it does limit theiropportunities.
We collect data on a variety of characteristics ofpoliticalsystems,partly because we want to be exible regarding the�meaning of “good government.” Where possible, we use variablesfrom different sources to check the robustness of our results. Ourpolitical variables fall into four broad groups.The rst includes�the de facto independence of the executive and an index of con-straints on the executive. The second group includes an index ofthe effectiveness of the legislature and a measure of competitionin the legislature’s nominating process. The third group includesa measure of autocracy and one of political rights.
An additional variable that we focus on,used in the earlierwork by La Porta et al. [1998,1999] is legal origin.We classifycountries based on the origin of their commercial laws into ve�broad groups:English, French, German, Scandinavian,and So-cialist. Legal origin has been viewed as a proxy for the govern-ment’s proclivity to intervene in the economy and the stance ofthe law toward the security of property rights in a country [LaPorta et al. 1999].
Correlations among the political variables are presented inTable VI. Political variables tend to be strongly correlated withinblocks. For example, the measure of constraints on the executivepower is highly correlated with de facto independence of theexecutive (0.9761)and with the effectiveness ofthe legislature(0.9078).Yet, we report results on all three variables as each
29THE REGULATION OF ENTRY
comes from a different source. Similarly, blocks of variables tendto be correlated with each other. In particular, democracy tends tobe positively associated with competitive and limited executiveand legislative branches.Legal origin, in contrast, is insigni-�cantly correlated with other political variables (the exception isSocialist legal origin which has obvious correlations with democ-racy and limited government).13 Income levels are positively as-
13. Consistent with this nding, La Porta et al. [2001] nd that common law� �legal origin is associated with English constitutional guarantees of freedom, such
TABLE VICORRELATION TABLE FOR POLITICAL ATTRIBUTES
The table reports correlations among measures of regulation and thevariables used in Table VII. All variables are dened in Table II.� Signicance�levels are Bonferroni-adjusted.
Exec defacto
independence
Constraintson executive
powerEffectivenesslegislature
Competitionnominating Autocracy
Politicalrights
FrenchLO
Exec de factoindependence 1.0000
Constraints onexec. power 0.9761a 1.0000
Effectivenesslegislature 0.9210a 0.9078a 1.0000
Competitionnominating 0.8243a 0.8069a 0.8484a 1.0000
Autocracy 2 0.9085a 2 0.8844a 2 0.8514a 2 0.7819a 1.0000Political rights 0.8440a 0.8448a 0.8485a 0.7191a 2 0.8564a 1.0000French legal
origin 2 0.1814 2 0.1814 2 0.1901 2 0.1985 2 0.0258 0.0565 1.0000Socialist legal
origin 2 0.3321 2 0.2927 2 0.3236 2 0.3240 0.5475a 2 0.4572a 2 0.4169aGerman legal
origin 0.2101 0.2008 0.2023 0.1281 2 0.1920 0.2444 2 0.2141Scandinavian
legal origin 0.3391 0.3274 0.3378 0.2522 2 0.2978 0.3109 2 0.1727English legal
origin 0.2259 0.1998 0.1462 0.2412 2 0.2324 0.0778 2 0.4874aLn
GDP/POP1999 0.6900a 0.6703a 0.7483a 0.6123a 2 0.6389a 0.7519a 2 0.0767bLn(Number of
procedures) 2 0.5518a 2 0.5234a 2 0.5848a 2 0.4435b 0.4662a 2 0.4412a 0.4863a
Ln(Time) 2 0.5420a 2 0.5204a 2 0.5635a 2 0.4360b 0.4770a 2 0.4921a 0.3976b
Ln(Cost) 2 0.5070a 2 0.4937a 2 0.5656a 2 0.4177b 0.4075b 2 0.4588a 0.3472Ln(Cost 1
time) 2 0.5700a 2 0.5478a 2 0.6267a 2 0.4745a 0.4713a 2 0.5085a 0.3870b
a. Signicant at 1 percent; b. signicant at 5 percent; c. signicant at 10 percent.� � �
30 QUARTERLY JOURNAL OF ECONOMICS
sociated with democracy as well as with competitive and limitedexecutive and legislative branches, but not with the legal origin.The fact that countries with severe market failures have moreabusive governments by itself limits the normative usefulness ofthe Pigouvian model.
In Table VII we present the results of regressing the number
as the independence of the judiciary and the accountability of the government tothe law. These constitutional guarantees of freedom are strongly associated witheconomic freedoms, but less so with political freedoms.
TABLE VI(CONTINUED )
SocialistLO
GermanLO
ScandinavianLO
EnglishLO
LnGDP/
POP1999
Ln(Number ofprocedures)
Ln(Time)
Ln(Cost)
Ln(Cost 1time)
1.0000
2 0.1479 1.0000
2 0.1192 2 0.0612 1.0000
2 0.3365 2 0.1729 2 0.0139 1.0000
2 0.1995 0.3409 0.3133 2 0.0742 1.0000
0.1538b 0.0030b 2 0.3413b 2 0.5069a 2 0.4745a 1.00000.1869 2 0.0640 2 0.2914 2 0.4291b 2 0.5014a 0.8263a 1.00000.0319 2 0.0727 2 0.3007 2 0.2172 2 0.5953a 0.6354a 0.6147a 1.0000
0.0851 2 0.0933 2 0.2786 2 0.3094 2 0.6244a 0.7434a 0.7793a 0.9605 1.0000
31THE REGULATION OF ENTRY
TABL
E VI
IEV
IDEN
CE O
NRE
GULA
TION
AND
POLI
TICA
LAT
TRIB
UTES
The
tabl
e pr
esen
ts th
e re
sults
of r
unni
ng re
gres
sions
for t
he lo
g of
the
num
ber o
f pro
cedu
res a
s the
dep
ende
nt v
aria
ble.
We
run
seve
n re
gres
sions
usin
g va
rious
pol
itica
lindi
cato
rs d
escr
ibed
in T
able
II a
nd (l
og)
GDP
per c
apita
.Ro
bust
stan
dard
erro
rs a
resh
own
in p
aren
thes
es b
elow
the
coef
cient
s.�
Depe
nden
t var
iabl
e(1
)(2
)(3
)(4
)(5
)(6
)(7
)
Exec
utiv
e de
fact
o in
depe
nden
ce20
.124
9a
(0.0
322)
Cons
train
ts o
n ex
ecut
ive
powe
r20
.104
8a
(0.0
352)
Effec
tiven
ess
of le
gisla
ture
20.3
301a
(0.0
778)
Com
petit
ion
nom
inat
ing
20.
2763b
(0.0
999)
Auto
crac
y0.
0545b
(0.0
178)
Polit
ical r
ight
s20
.347
0(0
.218
5)Fr
ench
lega
l orig
in0.
7245a
(0.0
916)
Socia
list l
egal
orig
in0.
4904a
(0.1
071)
Germ
an le
gal o
rigin
0.72
76a
(0.1
363)
Scan
dina
vian
lega
l orig
in2
0.00
85(0
.173
3)Ln
GDP
/POP
1999
20.0
491
20.0
634c
20.0
087
20.
0902b
20.0
867a
20.0
939b
20.
1434a
(0.0
331)
(0.0
352)
(0.0
401)
(0.0
358)
(0.0
321)
(0.0
386)
(0.0
270)
Cons
tant
3.17
82a3.
2040a
2.87
09a3.
3540a
2.74
57a3.
1850
a2.
9492a
(0.2
334)
(0.2
408)
(0.2
586)
(0.2
641)
(0.2
888)
(0.2
599)
(0.1
955)
R20.
3178
0.28
720.
3424
0.24
750.
2640
0.23
500.
6256
N84
8473
7384
8485
a. S
igni
cant
at 1
per
cent
;�
b. s
igni
cant
at 5
per
cent
; c. s
igni
cant
at 1
0 pe
rcen
t.�
�
32 QUARTERLY JOURNAL OF ECONOMICS
of procedures on a constant and each ofthe political variablestaken one at a time and the log of per capita income.In inter-preting these regressions, we take the broad political measures oflimited and representative government as being exogenous toentry regulation. It is possible, of course, that both the politicaland the regulatory variables are simultaneously determined bysome deeper historical factors. Even so, it is interesting to knowwhat the correlation is. Does the history that produces goodgovernment also produce many or few regulations of entry? Thecontrol for the level of development is crucial(and in fact ourresults without this control are signicantly stronger).� Marketfailures are likely to be both more pervasive and severe in poorcountries than in rich ones. Moreover, our measures of goodgovernment are uniformly higher in richer countries. Withoutincome controls, our political variables may just proxy for incomelevels. Imagine, for example, that the consumers in poor countriesare exposed to a larger risk from bad rms entering their markets�and selling goods of inferior quality. The Pigouvian plannerwould then need more tools to screen entrants in the poorercountries.
Holding per capita income constant, countries with morelimited and representative governments have statistically sig-nicantly fewer procedures for entry regulation using ve out of� �six measures of better government.14 These results show thatcountries with more limited governments, governments moreopen to competition, and greater political rights have lighterregulation of entry even holding per capita income constant.Figure IV plots the number of procedures against the autocracyscore and shows that regulation is increasing in autocracy. Reg-ulation is heavy in autocratic countries such as Vietnam andMozambique and light in democratic countries such as Australia,Canada,New Zealand, and the United States.
The log of per capita GDP tends to enter these regressionssignicantly.� The interpretation of this result is clouded bothbecause there are problems of multicollinearity with the politicalvariables and because the direction of causation is unclear. In thepublic choice theory, burdensome regulation reects transfers�
14. Results are signicant in all� six regressions when we use time ratherthan number of procedures as the dependent variable.In contrast, results areinsignicant in three regressions (competition in the legislature’s nominating�process, autocracy, and political rights) when using cost as the dependentvariable.
33THE REGULATION OF ENTRY
from entrepreneurs or consumers, which are likely to be distor-tionary and, hence, associated with lower levels of income. Coun-tries may be poor because regulation is hostile to new businessformation.
Holding per capita income constant, countries of French,German, and Socialist legal origin have more regulations thanEnglish legal origin countries,while countries of Scandinavianlegal origin have about the same. The result that civil law coun-tries (with the exception of those in Scandinavia) regulate entrymore heavily supports the view that the legal origin proxies forthe state’s proclivity to intervene in economic life [La Porta et al.1999]. However, note that in itself this evidence does not discrimi-nate among the alternative theories in the same way as theevidence on democracy does: French origin countries mightmerely be more prepared to deal with market failures than com-mon law countries.
These results are broadly consistent with the public choicetheory that sees regulation as a mechanism to create rents forpoliticians and the rms they support.� The public choice theorypredicts that such rent extraction should be moderated by bettergovernment to the extent that outcomes in such regimes come
F IGURE IVAutocracy and Number of Procedures
The scatter plot shows the values of the (log) number of procedures against theautocracy score (higher values for more autocratic systems) for the 84 countries inour sample with nonmissing data for the autocracy score.
34 QUARTERLY JOURNAL OF ECONOMICS
closer to representing the preferences of the public.In contrast,these results are more difcult to reconcile with public interest�unless one identies it with political systems of countries such as�Bolivia, Mozambique, or Vietnam, where corruption is wide-spread, governments are unlimited, and property rights insecure.Of course, it is possible that autocratic countries would performeven worse in the absence of heavy regulation because marketfailures are larger and alternative mechanisms of social controlare inferior. Such a possibility strikes us as remote, especiallysince we hold the level of development constant.
VI. CONCLUSION
An analysis of the regulation of entry in 85 countries showsthat, even aside from the costs associated with corruption andbureaucratic delay, business entry is extremely expensive, espe-cially in the countries outside the top quartile of the incomedistribution. We nd that heavier regulation of entry is generally�associated with greater corruption and a larger unofcial� econ-omy,but not with better quality of private or public goods.Wealso nd that the countries with less limited, less democratic, and�more interventionist governments regulate entry more heavily,even controlling for the level of economic development.
This evidence is difcult� to reconcile with public interesttheories of regulation but supports the public choice approach,especially the tollbooth theory that emphasizes rent extraction bypoliticians [McChesney 1987; Shleifer and Vishny 1993]. Entry isregulated more heavily by less democratic governments, and suchregulation does not yield visible social benets.� The principalbeneciaries� appear to be the politicians and bureaucratsthemselves.
WORLD BANKDEPARTMENT OF ECONOMICS , HARVARD UNIVERSITYSCHOOL OF MANAGEMENT , YALE UNIVERSITYDEPARTMENT OF ECONOMICS , HARVARD UNIVERSITY
REFERENCESAcemoglu, Daron, and Thierry Verdier, “The Choice between Market Failures and
Corruption,” American Economic Review,XC (2000), 194 –211.Banerjee, Abhijit, “A Theory of Misgovernance,” Quarterly Journal of Economics,
CXII (1997), 1289–1332.
35THE REGULATION OF ENTRY
Central Intelligence Agency, CIA World Factbook (2001), published online. http://www.cia.gov/cia/publications/factbook/
Chidzero, Anne-Marie, “Senegal,” in The Informal Sector and Micronance Insti-�tutions in West Africa, Leila Webster and Peter Fidler, eds. (Washington, DC:The World Bank, 1996).
De Long J. Bradford, and Andrei Shleifer, “Princes and Merchants: European CityGrowth before the Industrial Revolution,” Journal of Law and Economics,XXXVI (1993), 671–702.
Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shlei-fer, “The Regulation of Labor,” Harvard University manuscript in prepara-tion, 2001a.
Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shlei-fer, “Courts: The Lex Mundi Project,” Harvard University, 2001b.
Djankov, Simeon, Caralee McLiesh, Tatiana Nenova, and Andrei Shleifer, “WhoOwns the Media?” NBER Working Paper No. 8288, 2001.
De Soto, Hernando, The Other Path (New York, NY: Harper and Row, 1990).Freedom House, Freedom of the World (New York, NY: Freedom House, 2001).Friedman, Eric, Simon Johnson, Daniel Kaufmann, and Pablo Zoido-Lobaton,
“Dodging the Grabbing Hand: The Determinants of Unofcial Activity in 69�Countries,” Journal of Public Economics, LXXVI (2000), 459– 494.
Henisz, Witold Jerzy, “The Institutional Environment for Economic Growth,”Economics and Politics, XII (2000), 1–31.
Institute for International Management Development,World CompetitivenessReport (Lausanne, Switzerland: IMD, 2001).
Jaggers, Keith, and Monty G. Marshall, “Polity IV Project,” Center for Inter-national Development and Conict Management,� University of Maryland,2000.
Johnson, Simon, Daniel Kaufmann, and Andrei Shleifer, “The Unofcial Econ-�omy in Transition,” Brookings Papers on Economic Activity, 2 (1997),159–239.
Kasnakoglu, Zehra, and Mu¨ nu¨ r Yayla, “Unrecorded Economy in Turkey: A Mone-tary Approach” (1999), in Informal Sector in Turkey,Volume I, Tuncer Bu-lutay, ed. (Ankara, Turkey: SIS, forthcoming).
La Porta, Rafael, Florencio Lopez-de-Silanes,Andrei Shleifer, and Robert W.Vishny, “Law and Finance,” Journal of Political Economy, CVI (1998),1113–1155.
La Porta Rafael, Florencio Lopez-de-Silanes,Andrei Shleifer, and Robert W.Vishny, “The Quality of Government,” Journal of Law,Economics,and Or-ganization, XV (1999), 222–279.
La Porta, Rafael, Florencio Lopez-de-Silanes, Cristian Pop-Eleches,and AndreiShleifer, “Guarantees of Freedom,” manuscript, Harvard University, 2001.
McChesney, Fred S., “Rent Extraction and Rent Creation in the Economic Theoryof Regulation,” Journal of Legal Studies, XVI (1987), 101–118.
Olson, Mancur, “Autocracy, Democracy, and Prosperity,” in Richard Zeckhauser,ed., Strategy of Choice (Cambridge, MA: MIT Press, 1991).
Peltzman, Sam, “Toward a More General Theory of Regulation,” Journal of Lawand Economics, XIX (1976), 211–240.
Pigou, Arthur C., The Economics of Welfare, 4th ed. (London: Macmillan and Co.,1938).
Reynolds,Thomas H., and Arturo A. Flores, Foreign Law: Current Sources ofCodes and Basic Legislation in Jurisdictions of the World (Littleton, CO: F. B.Rothman, 1989).
Sananikone, Ousa, “Burkina Faso,” in The Informal Sector and Micronance�Institutions in West Africa, Leila Webster and Peter Fidler, eds. (Washington,DC: The World Bank, 1996.)
Schneider, Friedrich, “The Value Added of Underground Activities: Size andMeasurement of Shadow Economies and Shadow Economy Labor Force Allover the World,” mimeo, 2000.
Schneider, Friedrich, and Dominik H. Enste, “Shadow Economies: Size, Causes,and Consequences,” Journal of Economic Literature, XXXVIII (2000), 77–114.
Shleifer, Andrei, and Robert W. Vishny, “Corruption,” Quarterly Journal of Eco-nomics, CVIII (1993), 599 – 617.
36 QUARTERLY JOURNAL OF ECONOMICS
Shleifer, Andrei, and Robert W. Vishny, The Grabbing Hand: Government Pa-thologies and their Cures (Cambridge, MA: Harvard University Press, 1998).
SRI International, International Practices and Experiences in Business StartupProcedures (Arlington, VA: SRI, 1999).
Stigler, George J., “The Theory of Economic Regulation,” Bell Journal of Econom-ics and Management Science,II (1971), 3–21.
Tullock, Gordon, “The Welfare Cost of Tariffs, Monopoly,and Theft,” WesternEconomic Journal, V (1967), 224–232.
Turnham, David, Bernard Salome,and Antoine Schwartz,The Informal SectorRevisited (Paris, OECD,1990).
World Bank, “Administrative Barriers to Investment in Africa: The Red TapeAnalysis,” FIAS, Washington, DC, 1999.
——, World Development Indicators (Washington, DC: The World Bank, 2001).World Economic Forum, The Global Competitiveness Report 2001, Klaus Schwab
et al., eds. (New York, NY: Oxford University Press, 2001).World Health Organization, Causes of Death and Life,Birth Statistics (Geneva,
Switzerland: World Health Organization, 1998).
37THE REGULATION OF ENTRY