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An Empirical Investigation of Firms' Responses to Minimum Standards Regulations

  • Tasneem Chipty
  • Ann Dryden Witte
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    We study firms' responses to minimum standards and other forms of regulatory intervention on both the probability of exit and the distribution of observable product quality, using firm level data for a nationally representative sample of markets. Our empirical work is motivated by the literature on quality and price competition in the presence of minimum standards. We find that minimum standards increase the probability that firms exit certain markets. Moreover, we find that exit can cause both the average and the maximum quality observed in the market to decline. This perverse regulatory effect occurs when excessively high standards cause high quality firms to exit. When minimum standards do not lead to exit, minimum standards can increase the average and maximum quality of products in the market. Such standards can not only force low quality firms to raise their quality, but may cause high quality firms to increase quality, presumably in an attempt to alleviate price competition and differentiate themselves from their now higher quality rivals.

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    File URL: http://www.nber.org/papers/w6104.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6104.

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    Date of creation: Jul 1997
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    Publication status: published as Children and Youth Services Review, Vol. 21 (April 1999): 111-146.
    Handle: RePEc:nbr:nberwo:6104
    Note: PE
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Chipty, Tasneem, 1995. "Economic Effects of Quality Regulations in the Day-Care Industry," American Economic Review, American Economic Association, vol. 85(2), pages 419-24, May.
    2. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-64, May.
    3. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    4. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    5. Gruenspecht, Howard K. & Lave, Lester B., 1989. "The economics of health, safety, and environmental regulation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 26, pages 1507-1550 Elsevier.
    6. Tasneem Chipty & Ann Dryden Witte, 1994. "Economic Effects of Quality Regulations in the Daycare Industry," NBER Working Papers 4953, National Bureau of Economic Research, Inc.
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