Regulatory burden: Impact on entrepreneurship

Understanding the effects of regulation on start-up activity and wage inequality

The Challenge

Reduced entrepreneurial activity and wage inequality is one of the world’s most pressing challenges and a cause of friction between large and small firms. Increased regulatory burden, especially on smaller firms, can explain the 50% decline in start-up activity in the US since the late 1970s. Despite several attempts, a complete picture of industry-level regulatory costs is lacking, especially for smaller firms, where most entrepreneurial activity starts.

The intervention

This research shows that regulatory burden on businesses in the US has been substantially increasing, and small entities bear higher regulatory costs per employee. By applying supervised machine-learning and data-mining techniques to documents of all US federal rules and regulations, the author builds measures of the regulatory burden on firms.

The impact

This research throws light on the impact of the regulatory burden on many features and secular trends of the US economy, such as increased mark-ups, stagnation of wages, decreased labour share, wage inequality and jobless growth. It aims to provide evidence on how lobbying by large firms has prolonged this friction and resulted in large advantages for these organisations over time. Additionally, the research will assist in understanding the causes and effects of regulation on wage inequality.

Shikhar Singla is a PhD student, Finance, graduating class 2021 at London Business School. Shikhar’s research focuses on regulation and political economy. He is interested in using machine learning techniques to empirically analyse the impact of regulations.

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