Regulation, Entrepreneurship, and Firm Size

We investigate whether regulatory growth disproportionately burdens small businesses relative to large businesses. Using panel data from RegData 3.0 and exploiting variation across industries over time, we empirically estimate the relationship between regulatory growth and growth in the number of small and large firms. Controlling for other factors, we find that a 10 percent increase in regulatory restrictions on a particular industry is associated with a reduction in the total number of small firms within that industry by about 0.5 percent, while simultaneously having no statistically significant association with the number of large firms in that industry. We also find that these magnitudes are amplified when this regulatory growth follows previous years of high regulatory growth, implying that unrelenting regulatory increases harm small businesses at an escalating rate