Rue de la Banque no. 50: Size-based regulations and firm growth: is small beautiful?

Economic growth has been sluggish worldwide in the last decade. Many factors are likely to contribute to this growth slowdown, most importantly falling productivity or lower population growth. It is also often argued that “red tape” (especially labour regulations) is an important contributing factor. However, the implicit costs and gains from regulations are both notoriously difficult to assess. In this issue of Rue de la Banque, we present the methodology that we use in our research (Garicano et al., 2016) to measure (essentially) the first component.

The impact of regulations is not as easily quantified as taxes and spending, because they have no budget and no obvious accounting method: some laws are not enforced, while others have little impact because firms would follow them even without the force of a law. Most countries, however, treat smaller firms more generously when it comes to business regulation, exempting them from some of the burdens on larger firms. A recent example is the US Affordable Care Act (“Obamacare”), under which firms with 50 or less workers face lower penalties for failing to provide employee health insurance than larger firms. Portugal (Braguinsky et al., 2011) and Italy (Schivardi and Torrini, 2008) also feature such size based regulations. The research in Garicano et al. (2016) uses this institutional feature to show how the overall costs of regulation can be calculated from observing companies’ response to this “tax on firm size”.