How do barriers to entry and expansion a§ect productivity? I answer this question by
examining the impact of Indiaís industrial policy reforms during the 1980s. In 1985, the "License
Raj", which controlled entry and capacity expansion in Indian manufacturing industries, was
partially dismantled by removing a subset of industries from its jurisdiction. To assess the
impact of this deregulation on TFP, I embed entry and expansion constraints in a heterogeneous
Örm model of industry equilibrium. The model predicts that relaxing these constraints improves
average industry productivity via changes in the composition of Örms in the industry. Moreover,
the model yields structural equations that can be used to recover estimates of the TFP gains
as well as estimates of the relative contributions of the changes in entry and expansion costs.
Using establishment-level data, I Önd that over a ten year period the reform resulted in a relative
TFP improvement of nearly 32% in the industries that were deregulated. The decomposition
of these gains suggests that changes in entry and expansion costs contributed almost equally to
the productivity improvement.