Thursday, January 12, 2017

Entry Regulation - Public Interest or Public Choice?

by Levi Russell

Don Boudreaux at his Cafe Hayek Blog points to a great article which comprehensively measures the effects of entry regulation - regulations associated with starting a business - that I thought I'd share.

The article does a great job explaining the three primary theoretical reasons for regulation:

1) the public interest view, which states that regulation is used by governments to correct for the many, many market failures existing in private markets

2) the public choice view, which states that regulation primarily serves politically-well-connected interest groups and that the public at large is inept to curtail these favors because of poor incentives and information problems associated with political decision making

3) another public choice view, which states that regulation benefits politicians because politicians are able to extract payments from private interests in exchange for not passing or exempting said private interests from the regulation

So what do the authors of the paper find? Here's the abstract:

We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with the public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.
The first 5 pages of the article go into a bit more depth about the three theories listed above and specifically how their analysis leads to the conclusions they draw.

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