fiscal incentives and local government accountability). They find that the deregulation reforms significantly reduced firm regulation burdens, and the drop in regulation burdens are greater where local governments are more accountable and have stronger fiscal incentives. They then relate the regional-level business entry, small business density, public health and pollution to local regulation level, controlling for regional fixed effects and time fixed effects. Since the local regulation level suffer from reverse causality—the size composition of local businesses and welfare may determine local regulation level—they instrument local regulation with the interaction of the post-deregulation dummy with the afore-mentioned institutional variables, holding constant regional fixed effects (since institutions as captured by the regional fixed effects directly affect the outcome variables). They find significant positive effects of deregulation for firm entry and small firm density, but not for pollution and public health.<sup>24</sup> The effects of entry regulations hinge critically on the implicit incentives and the specific context. For instance, the effects of foreign entry depend on how close the incumbent firm is to the technological frontier, which affects the incentive to innovate (Aghion et al. 2009). Aghion and others use an unbalanced panel of manufacturing firms in the United Kingdom between 1987 and 1993 to examine how foreign entry affects productivity growth and incumbent innovations. Recognizing that entry is potentially endogenous, they instrument it with policy intervention that affect the ease and cost underlying entry threat and actual entry—such as large-scale privatization, time-varying indicators of the implementation of the EU Single Market Program (SMP) in industries with medium or high entry barriers that were likely to be reduced the SMP, and competition investigations by the U.K. authority that culminated in entry-inducing remedies. They find nonuniform effects of entry on incumbent innovation—stronger for firms closer to the technological frontier. They suggest that this is due to the “escape-entry” effect: for firms sufficiently technologically advanced, incumbents work harder to innovate to win the technological race and to prevent entry or to mitigate the effects of entry. For technological laggards, the entry effect is to

> 24 Similar benefits are found in the deregulation experiment in Mexico by Bruhn (forthcoming), which uses crossmunicipality and time variations in implementation to study the effects of reducing registering costs on the number of firms, employment, prices, and income. Mexican registration reforms reduced registration procedures from eight to three on average. Relying primarily on difference-in-difference approach to infer the reform effects, the author finds that the reform increases the number of registered businesses by 5 percent in eligible industries. It creates more jobs: employment in eligible industries increase by 2.8 percent after the reform, benefiting primarily those previously unemployed and out of the labor force. It also benefits consumers at the expenses of the incumbent business owners: prices drop by 0.6 percent after the reform, while the increased competition associated with more entry reduces the average income of incumbent owners by 3.2 percent.  The same policy experiment, the creation of SARE in Mexico, is also studied by Kaplan et al. (2007), which find that new start-ups increased by around 4 percent for affected industries.

24