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

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1 November 2023

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American Economic Review 113(11) , pp.2894-2936, 2023

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DOI: 10.1257/aer.20210107

https://www.aeaweb.org/articles?id=10.1257/aer.20210107

This Journal article is published under the centre's Growth programme.