Advertisement

Journal of Quantitative Economics

, Volume 15, Issue 1, pp 1–14 | Cite as

Too Small to Regulate

  • Kaushik Basu
  • Avinash Dixit
Original Article

Abstract

The paper argues that to achieve compliance of firms with regulations such as product quality or environmental or health standards it is better to have industries with a few large corporations than numerous small firms. We construct a model to show that limited liability constraints bind more easily in competitive industries, making it harder to impose sufficiently severe penalties and costlier to send sufficient monitors. Having large corporations allows the government effectively to delegate some of its monitoring functions to the managers of the corporation. The tradeoff between this issue and the usual argument in favor of competition is considered.

Keywords

Regulation Firm size Limited liability Corruption Corporation 

JEL Classification

L10 L51 

Notes

Acknowledgements

We thank James Matthew Trevino for capable research assistance. Dixit thanks Nuffield Collge, Oxford, where part of his work was done, for its excellent academic facilities and generous hospitality.

References

  1. Akerlof, G., and R. Shiller. 2015. Phishing for Phools: The Economics of Manipulation and Deception. Princeton: Princeton University Press.CrossRefGoogle Scholar
  2. Basu, K. 2015. An Economist in the Real World: The Art of Policy Making in India. Cambridge: MIT Press.CrossRefGoogle Scholar
  3. Becker, G. 1968. Crime and punishment: an economics approach. Journal of Political Economy 76 (2): 169–217.CrossRefGoogle Scholar
  4. Bernheim, B.D., and M. Whinston. 1990. Multimarket contact and collusive behavior. Rand Journal of Economics 21 (1): 1–26. Spring.CrossRefGoogle Scholar
  5. Biglaiser, G., and J.W. Friedman. 1994. Middlemen as guarantors of quality. International Journal of Industrial Organization 12 (4): 509–531.CrossRefGoogle Scholar
  6. Chanda, T., G.K. Debnath, M.E. Hossain, M.A. Islam, and M.K. Begum. 2012. Adulteration of raw milk in the rural areas of Barisal district of Bangladesh. Bangladesh Journal of Animal Science 41 (2): 112–115.Google Scholar
  7. Coase, R.H. 1937. The nature of the firm. Economica 4 (16): 386–405.CrossRefGoogle Scholar
  8. Cournot, A.-A. 1838. Recherches sur les Principes Mathématiques de la Théorie des Richesses. Paris: L. Hachette.Google Scholar
  9. Dharmapala, D., J. Slemrod, and J.D. Wilson. 2011. Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs. Journal of Public Economics 95 (9–10): 1036–1047.CrossRefGoogle Scholar
  10. International Monetary Fund. 2014. Global Financial Stability Report: Moving from Liquidity to Growth Driven Markets. IMF: Washington, D.C.Google Scholar
  11. Williamson, O.E. 2002. The theory of the firm as governance structure: from choice to contract. Journal of Economic Perspectives 16: 171–195. Spring.CrossRefGoogle Scholar
  12. Wolf, M. 2014. ’Too big to fail’ is too big to ignore. Financial Times, p. 7.Google Scholar

Copyright information

© The Indian Econometric Society 2017

Authors and Affiliations

  1. 1.Cornell UniversityIthacaUSA
  2. 2.Princeton UniversityPrincetonUSA

Personalised recommendations