Regulation, Entrepreneurship, and Firm Size

Employment and output effects of federal regulations on small business

“…births) in the subsequent year. Utilizing a similar panel of net annual changes in total small firms by industry derived from the SUSB database matched with changes in industry-level federal regulations from RegData, Chambers et al (2018) find robust evidence that a one percent increase in federal regulations is associated with a contemporaneous 0.042% decline in total small firms. Despite modeling differences, both papers yield nearly identical results: a 10% increase in federal regulations is associated with a nearly 0.5% reduction in the number of small firms.…”

“…As it turns out, the first empirical outcome has already been confirmed by Bailey and Thomas (2017) and Chambers et al (2018). Using a panel of firm births and deaths at the 4-digit NAICS industry level from the Census of US Business (SUSB) and industry-level federal regulation data from RegData, Bailey and Thomas (2017) find robust evidence that higher federal regulations within a given industry reduces the overall number of small firms within that industry.…”

“…Bailey and Thomas (2017) find that greater industry-specific regulations are associated with a reduction in the entry of new firms, with the greatest impact affecting smaller firms. Similarly, Chambers et al (2018) find that an increase in industry-specific regulations is associated with a reduction in both the number and employment of small firms, whereas large firms (with 500 or more employees) are unaffected. In a notable departure from the above two papers, Goldschlag and Tabarrok (2018) modify their dependent variables (new firm formation and hiring) by way of the Davis-Haltiwanger-Schuh (DHS) transformation, which is claimed to be a more robust measure of dynamism.…”

“…To verify the remaining two testable implications from our dynamic general equilibrium model, the empirical analysis below uses regression models similar to Bailey and Thomas (2017) and Chambers et al (2018) to test for a reduction in both small firms' share of employment and output in response to higher federal regulations.…”

“…In a calibrated version of the above macroeconomy, Dhawan and Guo (2001) numerically show that at the model's steady state, an increase in government regulations will yield the following empirically testable outcomes: 1) the total number of small firms is reduced, 2) the employment share of small firms shrinks, and 3) small firms' share of total output declines. The first outcome is appropriately tested and supported by Bailey and Thomas (2017) and Chambers et al (2018), but the latter two predictions have not been empirically evaluated in the literature. Therefore, our empirical analysis tests for a reduction in both small firms' share of employment and output in response to higher federal regulations.…”