Abstract
Many scholars have worried that regulation deters entrepreneurship because it increases the cost of entry, reduces innovation in the regulated industry, and benefits large firms because they can overcome the costs of complying with regulations more easily than smaller firms. Using novel data on the extent of US federal regulations by industry and data on firm births and employment from the Statistics of US Businesses, we run fixed effects regressions to show that more-regulated industries experienced fewer new firm births and slower employment growth in the period 1998–2011. Large firms may even successfully lobby government officials to increase regulations to raise their smaller rivals’ costs. We also find that regulations inhibit employment growth in all firms and that large firms are less likely to exit a heavily regulated industry than small firms.
Notes
More broadly, the literature on the relationship between institutional quality and economic growth suggests that countries with better institutions and greater levels of economic growth often have less burdensome regulatory institutions (Hall and Jones 1999; Acemoglu et al. 2001; Djankov et al. 2006). Countries that have better institutions (open access to political power, greater constraints on the executive, and greater political rights) tend to have less burdensome regulation and, as a result, tend to perform better in terms of economic growth (Djankov et al. 2002).
Maloney and McCormick (1982) show for the example of cotton dust regulation that such regulation benefited producers with a larger fraction of cotton used by the firms in their production process. Their evidence suggests that regulation specific factors other than firm size may determine the distribution of regulatory rents within the industry.
We do not include many control variables we would prefer to because they are observed only at the national level (not the industry level) each year, they are perfectly collinear with year dummies; including them in a regression together with year dummies causes some variables to be dropped. Thus, we use year dummies as our only national-level controls in the regressions reported in the body of the paper. Unreported regressions using the macroeconomic controls plus a linear time trend instead of year dummies show results that are nearly indistinguishable our main results.
While our results for the effect of regulation on firm birth and employment growth of large firms are not statistically significant in any of our specifications, they are of a greater magnitude than the results for small firms, which are all statistically significant.
References
Acemoglu, D., Johnson, S., & Robinson, J. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369–1401.
Al-Ubaydli, O., & McLaughlin, P. A. (2014). RegData: A numerical database on industry-specific regulations for all U.S. Industries and Federal Regulations, 1997–2012. Mercatus Center Working Paper No. 12-20 .
Barrett, S. (1991). Environmental regulation for competitive advantage. Business Strategy Review, 2(1), 1–15.
Barrett, S. (1992). Strategy and the environment. Columbia Journal of World Business, 27(3&4), 202–208.
Birnbaum, P. H. (1984). The choice of strategic alternatives under increasing regulation in high technology companies. Academy of Management Journal, 27(3), 489–510.
Bjornskov, C., & Foss, N. J. (2008). Economic freedom and entrpreneurial activity: Some cross-country evidence. Public Choice, 134(3/4), 307–328.
Branstetter, L., Lima, F., Taylor, L. J., & Venancio, A. (2013). Do entry regulations deter entrepreneurship and job creation? Evidence from recent reforms in portugal. The Economic Journal, 124(June), 805–832.
Brock, W. A., & Evans D. S. (1989). Small business economics. Small Business Ecnomics, 1(1), 7–20.
Calcagno, P. T., & Sobel, R. S. (2013). Regulatory costs on entrepreneurship and establishment employment size. Small Business Economics, 41(1), 541–240.
Coffey, B., McLaughlin, P. A., & Tollison, R. (2012). Regulators and redskins. Public Choice, 153, 191–204.
Coffey B., McLaughlin P. A., & Peretto P. (2016). The cumulative cost of regulations. Mercatus working paper. Mercatus Center at George Mason University.
Dawson, J., & Seater, J. (2013). Federal regulation and aggregate ecnomic growth. Journal of Economic Growth, 18, 137–177.
Dean, T. J., & Brown, R. L. (1995). Pollution regulation as a barrier to new firm entry: Initial evidence and implications for future research. Academy of Managment Journal, 38(1), 288–303.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. The Quarterly Journal of Economics, 117(1), 1–37.
Djankov, S., McLiesh, C., & Ramalho, R. M. (2006). Regulation and growth. Economics Letters, 92, 395–401.
Hall, R., & Jones, C. (1999). Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics, 144(1), 83–116.
Helland, E., & Matsuno, M. (2003). Pollution abatment as a barrier to entry. Journal of Regulatory Economics, 24(2), 243–259.
Klapper, L., Laeven, L., & Raghuram, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82, 591–629.
Maloney, M. T., & McCormick, R. E. (1982). A positive theory of environmental quality regulation. Journal of Law and Economics, 25(1), 99–123.
Mulligan, C., & Shleifer A. (2005). Conscription as regulation. American Law and Economics Review, 7(1), 85–111.
Nystrom, K. (2008). The institutions of economic freedom and entrepreneurship: Evidence from panel data. Public Choice, 136(3/4), 269–282.
Pashigian, B. (1984). The effect of environmental regulation on optimal plant size and factor shares. Journal of Law and Economics, 27, 1–28.
Peltzman, S. (1976). Toward a more general theory of regulation. The Journal of Law and Economics, 19(2), 211–240.
Pigou, A. (1938). The economics of welfare. London: McMillan.
Sobel, R. S., Clark, J., & Lee, D. R. (2007). Freedom, barriers to entry, entrepreneurship, and economic progress. Review of Austrian Economics, 20, 221–236.
Stigler, G. J. (1971). The theory of economic regulation. The Bell Journal of Eocnomics and Managment Science, 2(1), 3–21.
Thomas, L. G. (1990). Regulation and FIrm Size: FDA impacts on innovation. The Rand Journal of Economics, 21(4), 497–517.
Tullock, G. (1967). The welfare costs of tarriffs, monopolies, and theft. Western Economic Journal, 7, 224–232.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bailey, J.B., Thomas, D.W. Regulating away competition: the effect of regulation on entrepreneurship and employment. J Regul Econ 52, 237–254 (2017). https://doi.org/10.1007/s11149-017-9343-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-017-9343-9