Increased Regulation Inhibits New Firm Creation and Small Firm Employment, Report Finds
Commentary by Steven Lofchie
In a study titled "Regulating Away Competition: The Effect of Regulation on Entrepreneurship and Employment," Mercatus scholars Diana Thomas and James Bailey confirmed "the hypothesis that regulation inhibits business growth and job creation while protecting larger, existing businesses."
The study found that:
- "A 10% increase in the intensity of regulation leads to a statistically significant 0.5% decrease in overall firm births. There is a statistically significant decrease among births of small firms but no statistically significant effect on births of large firms, confirming the hypothesis that incumbent firms benefit from regulation because it deters new entrants."
- "Regulation had no statistically significant effect on firm deaths. Regulation drives away new entrants, but does not put existing firms out of business. In fact, there is some evidence that firm deaths may decrease with increased regulation as businesses benefit from less competition."
- "A 10% increase in regulation is associated with a statistically significant 0.9% decrease in hiring among all firms and a 0.5% decrease specifically among small firms."
The study concluded that regulators "must carefully consider their consequences and justify regulation in light of its likely negative impact on economic growth" before "promulgating new federal regulations."
Commentary
The financial industry was not the focus of the study but is certainly relevant to it. The implications of the study are that we should expect more exits than entries, and that the industry itself will become more concentrated.