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Regulatory costs on entrepreneurship and establishment employment size

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  • Peter Calcagno

    ()

  • Russell Sobel

    ()

Abstract

In this article, we examine how the level of regulation affects the size distribution of businesses. To the extent that regulation functions as a fixed cost, it should lead to larger firm size. However, regulations may also lead to smaller establishments with firms outsourcing regulated activities or staying small to take advantage of state exemptions for small businesses from regulations. We empirically examine the relationship between the size distribution of establishments and the level of regulation using state- and industry-level panel data from 1992 to 2004. Our results suggest that regulation decreases the proportion of zero employee and 1–4 employee establishments. The proportion of establishments in the 5–9 employee range generally increases with the level of regulation. Thus, regulation appears to operate as a fixed cost causing establishments to be larger. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Peter Calcagno & Russell Sobel, 2014. "Regulatory costs on entrepreneurship and establishment employment size," Small Business Economics, Springer, vol. 42(3), pages 541-559, March.
  • Handle: RePEc:kap:sbusec:v:42:y:2014:i:3:p:541-559
    DOI: 10.1007/s11187-013-9493-9
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    References listed on IDEAS

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    1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
    2. Lacy Glenn Thomas, 1990. "Regulation and Firm Size: FDA Impacts on Innovation," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 497-517, Winter.
    3. Noel D. Campbell & Kirk C. Heriot & Andres Jauregui, 2010. "State Regulatory Spending: Boon or Brake for New Enterprise Creation and Income?," Economic Development Quarterly, , vol. 24(3), pages 243-250, August.
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    6. Sobel, Russell S., 2008. "Testing Baumol: Institutional quality and the productivity of entrepreneurship," Journal of Business Venturing, Elsevier, vol. 23(6), pages 641-655, November.
    7. Silvia Ardagna & Annamaria Lusardi, 2010. "Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints," NBER Chapters,in: International Differences in Entrepreneurship, pages 17-62 National Bureau of Economic Research, Inc.
    8. Patrizio Pagano & Fabiano Schivardi, 2003. "Firm Size Distribution and Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(2), pages 255-274, June.
    9. Henrekson, Magnus & Johansson, Dan, 1999. "Institutional Effects on the Evolution of the Size Distribution of Firms," Small Business Economics, Springer, vol. 12(1), pages 11-23, February.
    10. Robert W. Crandall & Clifford Winston, 2005. "Does antitrust policy improve consumer welfare? Assessing the evidence," Chapters,in: Governments, Competition and Utility Regulation, chapter 2 Edward Elgar Publishing.
    11. Baumol, William J., 1996. "Entrepreneurship: Productive, unproductive, and destructive," Journal of Business Venturing, Elsevier, vol. 11(1), pages 3-22, January.
    12. Kristina Nyström, 2008. "The institutions of economic freedom and entrepreneurship: evidence from panel data," Public Choice, Springer, vol. 136(3), pages 269-282, September.
    13. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    14. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    15. Casey B. Mulligan & Andrei Shleifer, 2005. "The Extent of the Market and the Supply of Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1445-1473.
    16. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-664, August.
    17. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
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    Cited by:

    1. Claudia Alvarez & José Ernesto Amorós & David Urbano, 2014. "Regulations and Entrepreneurship: Evidence from Developed and Developing Countries," Past Working Papers 02, Universidad del Desarrollo, School of Business and Economics, revised Nov 2014.
    2. repec:kap:regeco:v:52:y:2017:i:3:d:10.1007_s11149-017-9343-9 is not listed on IDEAS

    More about this item

    Keywords

    Regulation; Firm size; Establishments; Small business; Entrepreneurship; L25; L26; L51;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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