Product Market Reforms and Productivity: A Review of the Theoretical and Empirical Literature on the Transmission Channels

Product market reforms are microeconomic structural reforms that aim to improve the functioning of product markets by increasing competition amongst producers of goods and services. Theoretical models suggest that regulation and reforms which liberalise or improve the functioning of markets can positively affect productivity through three different channels, namely a reallocation of scarce resources (allocative efficiency), an improvement in the utilisation of the production factors by firms (productive efficiency) and an incentive for firms to innovate to move to the modern technology frontier (dynamic efficiency). This paper reviews the theoretical and empirical literature on these three channels and discusses policy implications for the European Union. Copyright European Communities 2007