Too Small to Regulate
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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.
KeywordsRegulation Firm size Limited liability Corruption Corporation
JEL ClassificationL10 L51
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.
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