Abstract
Stigler (Bell J Econ Manag Sci 2:3–21, 1971) proposed that regulation benefits politically influential interest groups rather than advancing the public interest. The Stiglarian perspective predicts that regulation raises barriers to entry that limit competition and creates economic rents for incumbents. Apart from the direct economic harm of such policies, regulation generates additional consequences. One hypothesized consequence ushered by anticompetitive rules is the widening of income disparities. This article therefore surveys the growing empirical literature that studies whether regulation ultimately exacerbates income inequality. Beginning with the literature on entry and start-up regulation, we find that these rules, as predicted by Stigler, limit entry and dampen entrepreneurship. Moreover, recent studies also indicate that these regulations are associated with higher income inequality. We also review the literature on occupational licensure. Consistent with Stigler (Bell J Econ Manag Sci 2:3–21, 1971), the literature chronicles widespread use of barriers to entry in labor markets, which have documented regressive effects on the distribution of income. Finally, we review research on financial regulation, in which studies have shown that some financial regulations are associated with less entrepreneurship and higher income inequality. Taken together, the recent empirical literature buttresses and extends the implications in Stigler (Bell J Econ Manag Sci 2:3–21, 1971). Regulation tends to benefit incumbents by limiting entry of economic participants, be it firms or workers, and exacerbates income inequality.
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Notes
With respect to the loss of real output and income resulting from government regulation, the literature contains two important papers. The first, Dawson and Seater (2013), finds that US federal regulations (proxied by way of page counts in the US Code of Federal Regulations) reduced US economic growth by two percentage points between 1949 and 2005, resulting in a $38.8 trillion loss of real output over the period. The second, Coffey et al. (2020), finds that US federal regulations (as measured by RegData) trimmed US economic growth by about 0.8 percentage points between 1997 and 2012. They estimate that if regulations had been frozen between 1980 and 2012, the US economy would have been 25% larger ($4 trillion) than it actually was by 2012.
For example, Geloso and March (2021) suggest that rent seeking by mental health providers helps to explain the increase in mental health institutionalizations between 1870 and 1910.
See McLaughlin and Sherouse (2019) for methodological details related to the construction of RegData.
Consistent with public choice theory, measures of cronyism have been shown to be related empirically to income inequality. Shughart et al. (2003) find that states with more influential special-interest groups also have higher levels of income inequality. Assuming that the volume of legislation and regulations beneficial to special interest groups increases with their influence, the finding is consistent with other papers that report a positive relationship between regulation and income inequality.
For a descriptive study of the extent and cost of occupational licensure in the United States, see Carpenter et al. (2018).
See Vaheesan and Pasquale (2018) for a critique of the economic analysis of occupational licensure.
Evidence on the effect of licensing on minority groups is mixed and disputed (Klein et al., 2012; Law & Marks, 2009). Licensing may reduce the probability that new teachers are Hispanic (Angrist & Guryan, 2008), increase the wages of minority nurses (Law & Marks, 2017) and reduce the labor supply more for white men than for black men (Blair & Chung, 2019). McLaughlin et al. (2013) review the earlier literature.
See Claessens and Perotti (2007) for a review of the earlier literature.
Christopoulos and McAdam (2017) find that financial regulation does not stabilize income inequality.
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Chambers, D., O’Reilly, C. The economic theory of regulation and inequality. Public Choice 193, 63–78 (2022). https://doi.org/10.1007/s11127-021-00922-w
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DOI: https://doi.org/10.1007/s11127-021-00922-w