Abstract
What explains variation in the extent of regulation across US states and industries? We examine cross-sectional variation in state government regulations facing 81 three-digit North American Industry Classification System industries by matching novel data on regulatory restrictions at the state-industry level with data on state-industry characteristics. For most states, an increase in industry size is positively correlated with the extent of regulation. Additionally, for most industries, a positive correlation is found between industry size and the degree to which state governments regulate that industry. When we control for unobserved heterogeneity at the state and industry levels, we find that the extent of regulation is correlated robustly with the size of the industry. However, other industry-level factors, like average wages, average establishment sizes, the distribution of establishment sizes, the number of workplace accidents, and toxic emissions, are uncorrelated with the extent of regulation. Taken as a whole, our findings are consistent with hypotheses for regulation that emphasize the fixed costs of establishing regulation, the political salience of large industries, and the possibility that larger industries are more attractive targets for regulatory rent-extraction.
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Notes
Federal RegData are available annually from 1970 onward. At present, State RegData are available only in cross section.
McLaughlin et al. (2019) rely on federal RegData to analyze the impact of industry lobbying expenditures on the extent of federal industry-level regulation. However, they do not include industry size in their analysis.
Bombardini (2008) develops and tests a model in which individual firms decide whether or not to lobby the government for protection. Her model, which builds on Olson (1965) and Grossman and Helpman (1994), predicts that lobbying will be undertaken by the largest firms and that more concentrated industries will lobby most intensively. The empirical literature on lobbying finds that firm size and industry concentration are important predictors of lobbying activity (see, for instance, Masters and Keim 1985; Bombardini 2008; Hill et al., 2013).
To probe the sensitivity of our results to different levels of clustering, we also clustered the standard errors by census region and by two-digit NAICS. Our findings are qualitatively similar regardless of how we cluster. We also estimated the model with fixed effects for each census region and two-digit NAICS industry and found roughly similar results.
Bailey et al. (2021) estimate that a 10% increase in state population increases the quantity of state government regulation by 2.2% to 3.3%. However, their data do not allow entering fixed effects to control for unobserved heterogeneity at the state level. It is worth noting that when we do not enter any fixed effects, a 10% increase in industry size increases industry-level regulation by 1.9%, which is close to the low end of their estimated range.
We also find no statistically significant relationship between emissions and regulation in our full sample (3545 observations), or if we focus only on those industries that generate significant pollution emissions (849 observations); however, regardless of the sample, the coefficient on industry size remains positive, statistically significant, and of similar magnitude.
Mulligan and Shleifer (2005) do not identify the precise beneficiaries of regulation. Regulation resolves disputes but their model does not indicate whether dispute resolution benefits organized interests or the public at large. Accordingly, their theory can co-exist with any of the standard theories of regulation. The fact that their main empirical model scales by state population might (at least implicitly) suggest that they have the public in mind, but that is just a conjecture. In our setting, we scale by industry size, which might suggest that industry benefits from regulation, but we also largely remain agnostic. As we discuss below, larger industries could be subject to more intervention if they generate more market failures, because they possess more political clout and are better positioned to lobby for entry barriers and other restrictions, because they are more politically salient to voters and politicians, or because they are more attractive targets for rent-extraction.
It is possible that the political salience of an industry depends on how important it is relative to other industries, rather than because of absolute size. We re-estimated our regression models with an industry’s share of state employment as a regressor. In none of the specifications is that variable statistically significant.
The fact that the industry fixed effects explain the bulk of the variation in regulation at the state-industry level also could be interpreted as evidence supporting the public interest theory; the prevalence of market failures undoubtedly varies across industries and industry fixed effects control for a source of unobserved heterogeneity. However, our evidence could equally be taken as supporting the special interest theory since rent-seeking activity also varies across industries.
If lobbying effort is a public good within an industry, the likelihood that it will be supplied is declining in the number of firms within the industry, other things equal. One might therefore expect political pressure to be decreasing in industry size, if larger industries consist of more firms. Of course, that conclusion assumes that all else is equal, which will not generally be true. Indeed, industries that consist of many small firms often are represented effectively in the political sphere by industry trade associations. Accordingly, we are agnostic on the interpretation of our empirical finding.
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Acknowledgements
For helpful comments on earlier versions of this paper, we are grateful to editors William Shughart and Peter Leeson, as well as two anonymous referees.
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Law, M.T., McLaughlin, P.A. Industry size and regulation: Evidence from US states. Public Choice 192, 1–27 (2022). https://doi.org/10.1007/s11127-022-00969-3
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DOI: https://doi.org/10.1007/s11127-022-00969-3