The Extent of the Market and the Supply of Regulation

Abstract

We present a model in which setting up and running a regulatory institution takes a fixed cost. As a consequence, the supply of regulation is limited by the extent of the market. We test three implications of this model. First, jurisdictions with larger populations affected by a given regulation are more likely to have it. Second, jurisdictions with lower incremental fixed costs of introducing and administering new regulations should regulate more. This implies that regulation spreads from higher to lower population jurisdictions, and that jurisdictions that build up transferable regulatory capabilities should regulate more intensely. Consistent with the model, we find that higher population U. S. states have more pages of legislation and adopt particular laws earlier in their history than do smaller states. We also find that the regulation of entry, the regulation of labor, and the military draft are more extensive in countries with larger populations, as well as in civil law countries, where we argue that the incremental fixed costs are lower. Copyright (c) 2005 Massachusetts Institute of Technology.

Law and Investment in Africa

“…Botero et al (2004) construct indices of labor market regulation and investigate their impact on labor force participation rates and unemployment. Mulligan & Shleifer (2005a, 2005b assess one of the ultimate forms of government intervention in private military conscription.…”

Market Building through Regional Integration Agreements : The EU and the ASEAN Way

“…With the principle of mutual recognition proving insufficient, the regulation path was of paramount significance, considering that the repeated use of the courts in disputes would have considerably increased transaction costs and could have led to different interpretations in similar cases. This recalls Glaeser and Shleifer's (2003) references to intermediate law and order systems, and according to Mulligan and Shleifer (2005), the criterion that market regulation requires high initial fixed costs, which can be better amortized over a greater number of disputes that occur when the population is larger.…”

Economic Freedom and the Process of Economic Growth: An Empirical Analysis Based on a New Measure

“…But, on the other hand, this may also lead to a deviation from the rule of law: more regulation could mean more corruption, and if the government has the political incentives to intervene in an ad hoc way, it can hurt the independence of the courts. We rely on the argument provided by Mulligan and Shleifer (2005) who show theoretically and empirically that the political costs and benefits of regulation are determined in such a way that a larger population leads to more regulatory burdens ceteris paribus. This explains why we included population as an instrument.…”