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Too Small to Regulate

Author

Listed:
  • Kaushik Basu

    (Cornell University)

  • Avinash Dixit

    (Princeton University)

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.

Suggested Citation

  • Kaushik Basu & Avinash Dixit, 2017. "Too Small to Regulate," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(1), pages 1-14, March.
    • Handle: RePEc:spr:jqecon:v:15:y:2017:i:1:d:10.1007_s40953-017-0072-9
    DOI: 10.1007/s40953-017-0072-9
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    References listed on IDEAS

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    1. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
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    3. Basu, Kaushik, 2015. "An Economist in the Real World: The Art of Policymaking in India," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262029626, December.
    4. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1036-1047, October.
    5. George A. Akerlof & Robert J. Shiller, 2015. "Phishing for Phools: The Economics of Manipulation and Deception," Economics Books, Princeton University Press, edition 1, number 10534.
    6. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
    7. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
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    Cited by:

    1. repec:aeb:wpaper:201607:i:7:y:2016 is not listed on IDEAS
    2. Chen, You-hua & Huang, Sun-jun & Mishra, Ashok K. & Wang, X. Henry, 2018. "Effects of input capacity constraints on food quality and regulation mechanism design for food safety management," Ecological Modelling, Elsevier, vol. 385(C), pages 89-95.
    3. Stelios Arvanitis & Alexandros Louka, 2015. "Martingale Transforms with Mixed Stable Limits and the QMLE for Conditionally Heteroskedastic Models," Working Papers 201508, Athens University Of Economics and Business, Department of Economics.
    4. Charles Nolan & Plutarchos Sakellaris & John D. Tsoukalas, 2016. "Optimal Bailout of Systemic Banks," Working Papers 2016_17, Business School - Economics, University of Glasgow.
    5. Dipankar Gupta, 2019. "Against Thresholds: Raising Capacity and Formalizing the Economy," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 62(1), pages 15-30, March.
    6. You-hua Chen & Chan Wang & Pu-yan Nie, 2020. "Emission regulation of conventional energy-intensive industries," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(4), pages 3723-3737, April.
    7. Gibson, Matthew, 2021. "Employer Market Power in Silicon Valley," IZA Discussion Papers 14843, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Regulation; Firm size; Limited liability; Corruption; Corporation;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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