Regulating away competition: the effect of regulation on entrepreneurship and employment

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.

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Regulation, entrepreneurship, and firm size

One size fits all? The differential impact of federal regulation on early-stage entrepreneurial activity across US states

Industry size and regulation: Evidence from US states

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).

Economists have long argued that incumbents may pursue such regulation of entry deliberately to protect themselves from competition by new entrants (Tullock 1967; Stigler 1971; Peltzman 1976).

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.

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Author information

Authors and Affiliations

1. Department of Economics, Providence College, 1 Cunningham Square, Providence, RI, 02918, USA James B. Bailey
2. Department of Economics and Finance, Heider College of Business, Creighton University, 2500 California Plaza, Omaha, NE, 68178, USA Diana W. Thomas

1. James B. Bailey