The Impacts of the Americans with Disabilities Act on the Entry and Exit of Retail Firms

Congress enacted The Americans with Disabilities Act of 1990 over the protests of small business advocates who claimed that the ADA would trigger a wave of bankruptcies. Although the profitability of firms may suffer from the costs of ADA compliance, no systematic evidence is available. This paper seeks to determine if the ADA had a measurable impact on both the entry of new firms and the failure rates (exit) of existing firms. The data used in the study are counts of business establishments currently operating by county and type of business. Backing out the entry and exit rates from the establishment count data is a major econometric contribution of the paper. The empirical results imply that the ADA indeed decreased the number of retail firms. There were fewer retail firms after the ADA was passed, and the drop was larger in states in which the ADA was more of a legal innovation, and in states that had more disabled people, more ADA-related lawsuits, and more ADA-related labor complaints. The same conclusions hold when baseline trends for larger establishments (those least vulnerable to the costs imposed by the ADA) are differenced out. There is also evidence that employment and access discrimination suits imposed real costs on retail stores, encouraging exit. However, the exit of incumbents was partially offset by new entrants, which may imply that stores less able to adapt to the new requirements made room for the entry of stores better able to adapt. So, while the prediction by the pessimists that the ADA would cause firms to fail may be correct, the decline in the number of firms was partially offset by new entry.