Colloquium: Regulatory Simplification and Firm Behavior: Evidence from Transaction-Level Data

Abstract:
Simplifying regulation and reducing bureaucratic costs are widespread policy objectives, yet evidence on their economic effects and on firms’ behavioral responses remains limited. We study whether and how a major regulatory simplification in the tax domain affects real business activity. Our setting leverages the European Union’s 2021 VAT reform, which substantially simplified VAT reporting and remittance for firms exporting to EU member states. Combining novel transaction-level administrative data covering more than 150 million observations with a difference-in-differences design, we find that the simplified reporting significantly increased real economic activity. Treated firms execute roughly 36\% more transactions, diversify their product scope, and expand into additional countries. Survey evidence confirms that firms perceive the reform as reducing compliance costs, and our mechanism tests are consistent with lower prices, reduced market-entry costs, and freed-up firm resources. However, we also document an unintended reporting consequence of the reform. For non-EU exporters, the simplified reporting applies only to transactions valued below EUR 150. After the reform, the distribution of transactions exhibits pronounced excess mass just below this threshold and a corresponding hole above it. Average prices and parcel weights per transaction decline after the reform, consistent with a strategic reporting response in which firms misreport values and split transactions into multiple parcels to qualify for the simplified regime.