Italian firm growth hindered by regulatory costs

The paper estimates firm growth costs by measuring "bunching" – the tendency of firms to cluster just below regulatory thresholds to avoid more burdensome rules.

This bunching is embedded in a profit maximization model to estimate behavioral elasticities for variables like revenues, assets, and employment.

The largest costs are associated with the loss of a flat-tax regime for the self-employed (around 10 percent of value added).

Other significant costs include the loss of simplified bookkeeping and quarterly VAT settlement (4-5 percent), the mandatory appointment of a board of statutory auditors (2 percent), and increased worker protection in the event of dismissal (1 percent for firms with at least 15 employees).

These costs are expressed as a share of value added for firms near the threshold.

The question of firm growth is critical, as larger firms generally exhibit higher productivity and pay better wages.

Countries like Italy, characterized by a prevalence of small firms, often experience lower average productivity and weaker growth.

Measuring the non-monetary and unobservable regulatory costs that discourage firm expansion has historically been challenging.

This paper addresses this by proposing a data-driven methodology that quantifies these costs across various regulatory thresholds, contributing to the literature on regulation's effects on firm growth and behavioral elasticities.