Research / Weiss Fund Supported ResearchMar 01, 2020

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

Amrit Amirapu, Michael Gechter
The Review of Economics and Statistics (2020) 102 (1): 34–48.

In this paper, we estimate the costs associated with an important suite of labor regulations in India by taking advantage of the fact that these regulations apply only to firms above a size threshold. Using distortions in the firm size distribution together with a structural model of firm size choice, we estimate that the regulations increase firms’ unit labor costs by 35%. This estimate is robust to potential misreporting on the part of firms and enumerators. We also 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.