The Welfare Effects of Distribution Regulations in OECD Countries

By Bradford, Scott | Economic Inquiry, October 2005 | Go to article overview
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The Welfare Effects of Distribution Regulations in OECD Countries


Bradford, Scott, Economic Inquiry


I. INTRODUCTION

The distribution sector plays a crucial and large role in most economies, (1) In the G-7 (United States, Japan, Germany, France, United Kingdom, Italy, and Canada), distribution's share of gross domestic product (GDP) ranges from 8% to 15%, and its share in employment ranges from 11% to 19% (Pilat 1997, table 2.1). Because almost all goods in an economy pass through this sector, distribution can heavily influence prices. For consumer goods, in particular, these price effects can be large. In Organisation for Economic Cooperation and Development (OECD) countries, consumer prices for final goods exceed the corresponding producer prices by 40% and more. In addition to--indeed, because of--its economic importance, distribution producers enjoy substantial political clout and have won many favorable regulations from the political process: see Kalirajan (2000) and Pilat (1997). These regulations may impose large welfare costs and may exert a large influence on trade flows. Nonetheless, relatively few publications rigorously analyze the potential overall welfare and trade effects of deregulating distribution. This study seeks to fill some of that void.

I first provide a brief overview of distribution regulations. Then I present new, internationally comparable distribution margins data for a sample of eight OECD countries. These data are used to infer the extent to which distribution regulations reduce efficiency. For four of these countries, I conduct an applied general equilibrium (AGE) analysis of the welfare effects of high margins and find that they impose large costs, rivaling those of protection. It appears that efforts to increase economic welfare should not ignore the potentially large gains from liberalizing distribution. This article also examines the relationship between restricted distribution and imports.

II. DISTRIBUTION REGULATIONS

Several studies have described a variety of distribution regulations in OECD countries. Nicoletti (2001), Boylaud (2000), Kalirajan (2000), and Pilat (1997) provide excellent overviews. These studies imply that, despite some liberalization, many impediments remain. The most burdensome regulations include: restrictions on large stores; onerous business set-up rules; restrictive zoning laws and other real estate regulations; limits on product ranges, store hours, and pricing; and monopoly distributors for certain products, such as pharmaceuticals, liquor, and tobacco. In addition, many local regulations work under the radar of studies such as these.

The limited literature on the subject implies that distribution regulations reduce welfare. Pellegrini (2000) estimates that deregulating retail trade would increase Italian GDP by more than 1%. Japan's Economic Planning Agency (1996) finds that loosening restrictions on large retailers has increased Japanese GDP by 1%. Pilat (1997) cites a European Commission study that finds that liberalizing store hours has greatly increased consumer welfare. Carree and Nijkamps (2001) find efficiency gains after entry barrier removal in the Netherlands. Nicoletti (2001) concludes: "Both simulation and econometric studies point unequivocally to potentially large welfare gains from the liberalization of ... retail trade." Also, Burda (2000) and studies cited in Nicoletti (2001) find that employment would increase, not decrease, with liberalization.

These studies provide valuable information, but none simulate the effect of a country's total package of distribution regulations on welfare. I do so by exploiting AGE modeling, which takes account of links among industries (and nations) to produce broad-brushed estimates of inflated margins' effects in multiple countries. Distribution's widespread influence on an economy makes an AGE approach especially important. (2)

III. MEASURING MARGINS

The Underlying Data

The distribution margins data grow out of protection data developed in Bradford (1998, 2003).

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