NBER Working Papers by Nicolas A. Roys

In France, firms with 50 employees or more face substantially more regulation than firms with less than 50. As a result, the size distribution of firms is visibly distorted: there are many firms with exactly 49 employees. We model the regulation as a sunk cost that must be paid the first time the firm reaches 50 employees, and we estimate the model using indirect inference by fitting these salient features of the size distribution. The key finding is that the legislation acts like a sunk cost equivalent to approximately one year of an average employee salary. Removing the regulation improves labor allocation across firms, leading to a productivity gain of around 0.3%, holding the number of firms fixed. However, if firm entry is elastic, the steady-state gains are significantly smaller.