Enforcing Competition and Firm Productivity: Evidence from 1,800 Peruvian Municipalities

This paper uses a unique data set that captures the elimination of subnational regulatory barriers to firm entry and competition across 1,800 municipalities and matches it with establishment census panel data to estimate the impact on establishment productivity and markups. The elimination of local barriers that were inconsistent with national legislation was the result of legal reforms that strengthened the mandate of Peru's competition authority. Legislative changes in 2013/14 empowered the competition authority to enforce the elimination of illegal, sector-specific subnational regulatory barriers to firm entry and competition, conditional on the existence of a precedence. The changes provide a unique quasi-experimental setting to identify the impact of enforcing competition within the controlled institutional environment of a single country. The paper finds that the elimination of subnational barriers to entry boosted the (revenue) productivity of establishments operating in reform municipalities and sectors relative to establishments in nonreform municipalities/sectors. But it did not raise the establishments' markups, which, if anything, declined, suggesting that physical productivity improved. The paper provides a wide range of evidence supporting a causal interpretation of this finding. The results suggest that strengthening the mandate of institutions enforcing competition is critical to raise productivity.