Regulating Away Competition
September 28, 2015
One important input into economic growth is new firm creation. The institution that theoretically matters most for the creation of new firms is regulation of entry. As the number of procedures required before starting a new business increases, fewer new businesses will enter the market.
Many scholars believe that regulation deters entrepreneurship because larger firms can overcome the costs of complying with regulations more easily than smaller firms. Large firms may even pursue such regulation of entry deliberately to protect themselves from competition.
Heavily regulated industries experienced fewer new firm creation and slower employment growth between 1998 and 2011, and regulations inhibited employment growth primarily in small firms rather than large firms.
Regulation inhibits business growth and job creation while protecting larger, existing businesses.
- A 10% increase in the intensity of regulation leads to a statistically significant 0.5% decrease in overall firm births.
- Regulation had no statistically significant effect on firm deaths. Regulation drives away new entrants, but does not put existing firms out of business.
- A 10% increase in regulation is associated with a statistically significant 0.9% decrease in hiring among all firms and a 0.5% decrease specifically among small firms.
Overall, the study suggests that increased federal regulation reduced the entry of new firms by 1.2% and reduced hiring by 2.2%.
Regulators should be more aware of the important tradeoff between regulation and firm creation and should consider more carefully the potential economic effects of their decisions regarding new and expanding levels of regulation.
Source: James Bailey and Diana Thomas, "Regulating Away Competition," Mercatus Center, September 2015.
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