How fast does product market reform pay off? New evidence from non-manufacturing industry deregulation in advanced economies

Abstract

The paper sheds light on the issue of how fast product market deregulation pays off and whether it entails any transitory costs by using a unique mapping between a new narrative dataset of major reform events and sector-level outcomes for 5 major non-manufacturing industries in 26 advanced economies over the period 1975–2011. Using a local projection method, we find that deregulation pays off only gradually: its positive effect on output becomes statistically significant three to four years after the reform, consistent with the notion that entry takes time due to real frictions. At the same time, there is no evidence of any significant transitory cost. Over the medium term, these product market reforms eventually yield large, highly significant increases in output, concomitant with a relative price decline. The typical major historical reform in advanced economies increased real value added and employment in the deregulated industry by about 10 percent and over 5 percent, respectively, and lowered relative prices by some 8 to 10 percent, after five years.