Does Less Market Entry Regulation Generate More Entrepreneurs? Evidence from a Regulatory Reform in Peru

Starting a new business in a developing country is difficult. Aspiring entrepreneurs often need to spend large amounts of time and money to formally open a new business. As a result, many entrepreneurs in developing countries avoid official licensing procedures by operating informally or not operating at all. Starting with De Soto (1990), a large literature has pointed toward official licensing procedures as an important constraint on entrepreneurial activity in developing countries. This constraint on entrepreneurial activity in turn stifl es innovation, reduces competition, and lowers economic growth. However, there is little empirical evidence on whether reductions in licensing procedures indeed generate more entrepreneurial activity. To address this question, we analyze the impact of licensing procedures on entrepreneurial activity by studying a reform of municipal licensing procedures in Lima, Peru. The reform reduced the cost and time to register for a municipal business license. We study this specifi c reform for two reasons. First, by analyzing a change in licensing procedures, we can identify the impact of licensing procedures on entrepreneurial activity separately from