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The Impact of Regulation on Entrepreneurship and Innovation
Date of Award
Olin Business School
Doctor of Philosophy (PhD)
While entrepreneurs are hailed as the key to innovation and growth, often in industries where these benefits are most desired, governments add regulations that may handicap entrepreneurs and dampen these benefits. Given the importance of both entrepreneurship and regulation to improving social outcomes, it is imperative for entrepreneurship scholars and policy makers to better understand these apparently countervailing forces of free entry and regulation. This work investigates the impact of regulations on competition, entry, and innovation (productivity growth) using the natural quasi-experimental properties of the U.S. bail bond industry.
The first chapter analyzes the impact of entry and operating regulation on price competition. Entry is valued because it triggers competition through lower price-cost margins in the short run and greater efficiency in the long run. However, there is concern that regulations, by restricting entry, may deter competition. I adapt Bresnahan and Reiss' (1991) methodology to examine a proprietary data set of firm counts, demand, and regulations and use counter-factual policy experiments to test not only the effects of regulation on price competition generally, but also the relative effects of particular regulations. This analysis finds the counter-intuitive result that a regulatory environment with entry regulations requires fewer firms than an environment with unrestricted entry to achieve a competitive environment. Operating regulations were found to have no impact on price competition. These results suggest that there does not appear to be a penalty to price competition from regulations.
Entrepreneurship is valued primarily because it stimulates Schumpeter's gale of creative destruction. However, a popular view, reinforced by recent empirical work on regulatory reform, is that regulation inhibits entrepreneurship and innovation (productivity growth). The second chapter of my dissertation investigates this relationship. As regulations are designed primarily for first-order concerns such as correcting market failures, it is important to understand the relative performance of different types of regulations with respect to their impact on entry and innovation. However, the literature offers little guidance. This is because prior empirical work has either looked at the impact of a particular regulation or, more commonly, has employed proxy measures of regulatory extent. This analysis uses structural models of the entrepreneur's entry decision and the incumbent's continuation (not to exit) decision to conduct counterfactual policy experiments that allow for comparison of the impact of different regulatory regimes on entry and innovation. Results from this exercise indicate that regulations that operate through firm selection mechanisms decrease firm counts, yet increase innovation whereas regulations that seek to alter firm behavior directly have no impact on firm entry or innovation. These results suggest that it is possible to design regulations without imposing the Schumpeterian cost on innovation. They also provide preliminary evidence as to which regulations best accomplish this goal.
Chair and Committee
Anne Marie Knott
Nicholas Argyres, Daniel Elfenbein, Barton Hamilton, Juan Pantano, Carl Sanders
Scott, Erin Lynne, "The Impact of Regulation on Entrepreneurship and Innovation" (2013). Arts & Sciences Electronic Theses and Dissertations. 257.