Labor Regulations and the Cost of Corruption: Evidence from the Indian Firm Size Distribution

In this paper, we estimate the costs associated with a suite of labor regulations in India whose components have gone largely unstudied in developing countries. We take advantage of the fact that these regulations only apply to firms above a size threshold. Using distortions in the firm size distribution at the threshold together with a structural model of firm size choice, we estimate that the regulations increase firms’ unit labor costs by 35%. We document a robust positive association between regulatory costs and exposure to corruption, which may explain why regulations appear to be so costly in developing countries.

Written with Michael Gechter (Pennsylvania State University)

07 Feb
  • Amrit Amirapu (University of Kent)
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