NCPA - National Center for Policy Analysis

Cost Of Barriers To Entry

March 1, 2001

Many governments create barriers to entry in business. This can be in the form of red tape, fees or simple bribery. Some economists say these regulatory barriers prevent fly-by-night operations from swindling people out of their money. Others argue that these regulations are used for political benefit and advantage existing firms by limiting competition. A recent study determines that there are no benefits to such regulatory barriers -- for either incumbent firms or consumers.

A major component of these costs is delay -- for instance, it takes an average of six months to get the necessary permits and licenses in Mozambique, 66 days in France and five months in Austria.

The study analyzed 75 different countries and their regulatory barriers. The costs of these barriers varies, but the greatest burden is in poorer countries:

  • The average cost of complying with regulations in order to legally enter a market or start a business is equivalent to 34 percent of per capita income worldwide.
  • This equates to 10 percent or less of per capita income in the richest nations, but 65 percent or more of per capita income in the poorest nations.
  • Setting up shop in nations like Vietnam, Bolivia or Egypt can cost 1 to 2 times an entrepreneur's yearly income.

These extra costs do not have tangible benefits for consumers. The study finds that:

  • Product quality does not improve, but actually decreases.
  • Pollution and health levels remain the same.
  • They increase corruption of regulatory officials and encourage black market activity.

The authors find that the real beneficiaries are the politicians who control the regulatory system and those who are well connected.

Source: "A Helping or Grabbing Hand?" Economic Intuition, Fall 2000; based on Simeon Djankov, Rafael La Porta, Florencia Lopez-de-Silanes and Andrei Shleifer, "The Regulation of Entry," Working Paper No. w7892, September 2000, National Bureau of Economic Research.

For NBER abstract


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