Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in Portugal

Abstract

Abstract We evaluate the consequences of a recent regulatory reform in Portugal, which substantially reduced the cost of firm entry. Our analysis uses matched employer–employee data, which provide unusually rich information on the characteristics of founders and employees associated with new firms before and after the reform. We find that the short‐term consequences of the reform were as one would predict with a standard economic model of entrepreneurship: the reform resulted in increased firm formation and employment, but mostly among ‘marginal firms’ that would have been most readily deterred by existing heavy entry regulations. These marginal firms were typically small, owned by relatively poorly educated entrepreneurs, and operating in low‐technology sectors (agriculture, construction and retail trade). In comparison to firms that entered in the absence of the reform, these marginal firms were less likely to survive their first two years.