the reform leads to increased entry. Depending on the assumption about returns in the informal sector, the increase in entry comes either from informal business owners registering their business or wage earners opening new businesses. The model also predicts that increased entry leads to a decrease in prices and to a decline in income for incumbent businesses.

The paper then tests the predictions of the model using the Mexican reform. The identi...cation strategy used to estimate the e¤ects of the reform relies on the fact that implementation of the business registration reform in Mexico varied across municipalities and across time. The reform was organized by a federal agency, the COFEMER. This agency had to coordinate with municipality governments on implementing the reform since many business registration procedures are set locally in Mexico. COFEMER’s goal was to bring the reform to urban municipalities that had the largest volume of economic activity in Mexico. However, due to sta¤ constraints, COFEMER could not implement the reform in all the priority municipalities at the same time. Moreover, they did not specify a particular pattern of implementation within the set of priority municipalities. A number of checks suggest that the order of implementation was indeed exogenous to the outcomes in this set of municipalities.

The reform reduced registration procedures from 8 on average to less than 3. To give a sense of the magnitude of this reform, the reduction corresponds to going from the 30th percentile in registration procedures to the 2nd percentile, or equivalently it corresponds to going from Peru or Pakistan to New Zealand or Australia. It is important to note that only ...rms in low-risk to society<sup>4</sup> and unregulated industries were eligible for the reform. These eligible industries encompassed approximately 80 percent of pre-reform ...rms.

The results show that the reform increased the number of registered businesses by 5 percent in eligible industries, supporting the ...nding of the cross-country literature that lower regulation leads to more entry. The increase in the number of new businesses came exclusively from former wage earners opening businesses. Informal (non-registered) business owners were not more likely to register their business after the reform. The results also show that employment in eligible industries increased by 2.8 percent after the reform. In particular, people who were previously unemployed or out of the labor force were more likely to work as wage earners after the reform.

By increasing competition, the reform bene...tted consumers and hurt incumbent businesses. First, using the Mexican CPI as an outcome variable, I ...nd that the reform decreased the price level by 0.6 percent. The fact that the price decline was concentrated among low-risk industries in the non-tradable goods sector indicates that this was due to competition. Second, the income of incumbent registered businesses declined by 3.2 percent. Some of the evidence also suggests

> 4 Low-risk industries are industries that do not present a serious risk to public health, public security, or the environment. An example of a high-risk industry is chemical production.

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