ISSN 1725-3187 (online) ISSN 1016-8060 (print) EUROPEAN ...

ISSN 1725-3187 (online) ISSN 1016-8060 (print)

EUROPEAN ECONOMY

Economic Papers 533 | September 2014

The Economic Impact of Professional Services Liberalisation

Erik Canton, Daria Ciriaci, Irune Solera

Economic and Financial Affairs

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KC-AI-14-533-EN-N (online) ISBN 978-92-79-35182-2 (online) doi:10.2765/71387 (online)

KC-AI-14-533-EN-C (print) ISBN 978-92-79-36148-7 (print) doi:10.2765/80787 (print)

? European Union, 2014 Reproduction is authorised provided the source is acknowledged.

European Commission

Directorate-General for Economic and Financial Affairs

The Economic Impact of Professional Services Liberalisation

Erik Canton, Daria Ciriaci, Irune Solera

Abstract

Competition in professional services is, in some occasions, hindered by excessive regulation. This may constrain business dynamics (entry and exit of firms) and create inefficiencies and excessive rents. To improve market performance in those professional services generally regulated, several EU countries have reduced regulatory restrictions regarding the entry into and exercise of these professions. This study is an attempt to evaluate the effects of regulatory barriers in four of them, i.e. legal, accounting, architectural and engineering activities in the EU over the period 2008-2011. It is found that less strict regulation improves their allocative efficiency and reduces the observed larger-than-average profitability, through intensified business dynamics.

JEL Classification: C33, D22, E17, L84. Keywords: Professional services, regulated professions, allocative efficiency, profitability, business dynamics, churn rates, market regulation.

Corresponding author: Erik Canton, Daria Ciriaci, Irune Solera, European Commission, Directorate

General for Economic and Financial Affairs, erik.canton@ec.europa.eu, daria.ciriaci@ec.europa.eu,

irune.solera-lopez@ec.europa.eu.

Acknowledgments: This paper presents work carried out in the context of a broader project on the assessment of product market reforms, whose main findings are presented in the European Commission DG ECFIN report entitled "Market reforms at work in Italy, Spain, Portugal and Greece". Thanks are due for useful comments and advice to Anne Bucher, Isabel Grilo, Manuel Hubert and Josefina Monteagudo, and workshop participants on various occasions. The authors are also grateful to Catherine Jadot for her editorial support.

EUROPEAN ECONOMY

Economic Papers 533

I. Introduction

5

II. Regulation of professional services: theory and empirical background

7

II.1. Theoretical background

7

II.2. European policy background

7

II.3. Empirical evidence

9

III. Regulated professions and their interlinkages with the rest of the economy

13

IV. Methodology: data and econometric approach

15

IV.1. Description of the data

15

IV.1.1. Product market regulations and business dynamics

15

IV.1.2. Allocative efficiency

18

IV.1.3. Profitability

19

IV.2. The estimated equations

20

V. Results

23

V.1. The effect of regulation on sectoral performance: the role of churn rates

23

V.2. The effect of regulation on sectoral performance: the role of birth and death rates

25

VI. Conclusions

29

Annex1.

The effect of regulation on AE and profits through birth and death

rates

30

References

32

LIST OF TABLES

IV.1. Entry and conduct regulation indicators, PMR, OECD

16

IV.2. Entry and conduct regulation index for four professions in the 19 EU countries covered by

the OECD PMR

17

IV.3. Description of variables used to proxy business dynamics

17

IV.4. Pairwise correlation coefficients between sectoral business dynamics and PMR regulation

indicators

22

IV.5. Pairwise correlation coefficients between sectoral PMR regulation indicators and AE

22

IV.6. Pairwise correlation coefficients between sectoral PMR regulation indicators and profits

22

IV.7. Main descriptive statistics

22

3

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