This article reports estimates of the impact of service regulation reform on the productivity of French and Italian firms in retail, transports and professional services over the period 1998–2007. We implement a two‐stage least squares estimation: the first‐stage instruments mark‐ups, a financial measure of rents, with barriers to entry and the second stage estimates the impact of instrumented mark‐ups on total factor productivity (TFP), a real measure of firm efficiency. We find that entry barriers lower firm productivity by raising mark‐ups and rents. These estimates imply that, if French and Italian regulators had adopted the OECD best practices in terms of entry barriers, firms in these sectors would have increased their TFP level by five percentage points. We do not find any robust evidence of a non‐linear relation between mark‐up and productivity.