Here’s an Odd Result: Strict Regulation Apparently Doesn’t Hamper Startup Growth

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Does government regulation of an industry impede the creation rate of new startups, and thus reduce innovation and dynamism? Alex Tabarrok passes along a fascinating little nugget of research on the subject:

Could regulation be increasing barriers to entry, raising the costs of reallocation, and slowing the diffusion of productivity innovations? To test the hypothesis that regulation is reducing dynamism Nathan Goldschlag and I combined data on dynamism with an industry level measure of regulation.

Our measure of regulation is produced by an innovative technique that combs the Code of Federal Regulations (CFR) for restrictive terms or phrases such as “shall,” “must,” “may not,” “prohibited,” and “required”. The count of restrictive words in each section is then associated to industries via a machine learning algorithm that recognizes similarities between the language in that CFR section and industry language (e.g. a section of the text with words such as “pipeline” would be associated with the oil and gas industry). In this way, we can associate each industry with an index of regulation derived from the entire CFR.

Now, I have some doubts about this. For starters, it’s limited to federal regulation. State regulation is the big player in some industries. It also doesn’t really test the nature of the various regulations. A routine requirement to submit quarterly tax information gets the same weight as a heavily intrusive requirement to raise capital levels or monitor pollutant levels. Finally, that machine learning algorithm better be pretty good. Is it?

Still, despite these caveats, it’s an interesting approach. And what Tabarrok and Goldschlag found was the opposite of what they expected. As the chart above shows, industries with more regulation also had more startups. Stringent regulation doesn’t seem to impede dynamism at all. In fact, it encourages it. Further tests confirm this.

But why? I’ll toss out a few possibilities:

  1. The research methodology just isn’t up to the task. Regulation really does reduce the incentive to create startups, but this particular test is too underpowered to show it.
  2. Lots of regulations explicitly exclude small firms (usually those with under 50 employees). This doesn’t matter much in, say, the hospital business, where every firm will be above that threshold. But it does matter in other industries, and it might give startups an advantage over established firms. In other words, regulating the big guys might actually make small startups more attractive than they otherwise would be.
  3. Tabarrok suggests that regulation might be associated in some way with how dynamic an industry is in the first place. That is, especially profitable and growing industries might automatically attract the attention of regulators simply because they’re more noticeable. If that’s the case, the level of regulation might not be telling us anything aside from the fact that dynamic industries attract more regulation.
  4. Perhaps increased regulation mostly just drives the growth of a consultant class that helps startups create new businesses. Because of this, starting a new business isn’t any harder, it’s just a bit more expensive. But every other business is paying the same expenses to comply with regulations, so it’s not really much of a barrier to entry.
  5. Maybe only certain kinds of regulations affect dynamism and America is pretty good at avoiding those. The ones that are on the books are generally as minimal and targeted as possible and don’t much affect startup creation.

Any other ideas? It really is a bit of an odd result, regardless of whether you’re temperamentally in favor of regulation or not.

WE'LL BE BLUNT

It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

The short of it: Last year, we had to cut $1 million from our budget so we could have any chance of breaking even by the time our fiscal year ended in June. And despite a huge rally from so many of you leading up to the deadline, we still came up a bit short on the whole. We can’t let that happen again. We have no wiggle room to begin with, and now we have a hole to dig out of.

Readers also told us to just give it to you straight when we need to ask for your support, and seeing how matter-of-factly explaining our inner workings, our challenges and finances, can bring more of you in has been a real silver lining. So our online membership lead, Brian, lays it all out for you in his personal, insider account (that literally puts his skin in the game!) of how urgent things are right now.

The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

Because the in-depth journalism on underreported beats and unique perspectives on the daily news you turn to Mother Jones for is only possible because readers fund us. Corporations and powerful people with deep pockets will never sustain the type of journalism we exist to do. The only investors who won’t let independent, investigative journalism down are the people who actually care about its future—you.

And we need readers to show up for us big time—again.

Getting just 10 percent of the people who care enough about our work to be reading this blurb to part with a few bucks would be utterly transformative for us, and that's very much what we need to keep charging hard in this financially uncertain, high-stakes year.

If you can right now, please support the journalism you get from Mother Jones with a donation at whatever amount works for you. And please do it now, before you move on to whatever you're about to do next and think maybe you'll get to it later, because every gift matters and we really need to see a strong response if we're going to raise the $253,000 we need in less than three weeks.

payment methods

WE'LL BE BLUNT

It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

The short of it: Last year, we had to cut $1 million from our budget so we could have any chance of breaking even by the time our fiscal year ended in June. And despite a huge rally from so many of you leading up to the deadline, we still came up a bit short on the whole. We can’t let that happen again. We have no wiggle room to begin with, and now we have a hole to dig out of.

Readers also told us to just give it to you straight when we need to ask for your support, and seeing how matter-of-factly explaining our inner workings, our challenges and finances, can bring more of you in has been a real silver lining. So our online membership lead, Brian, lays it all out for you in his personal, insider account (that literally puts his skin in the game!) of how urgent things are right now.

The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

Because the in-depth journalism on underreported beats and unique perspectives on the daily news you turn to Mother Jones for is only possible because readers fund us. Corporations and powerful people with deep pockets will never sustain the type of journalism we exist to do. The only investors who won’t let independent, investigative journalism down are the people who actually care about its future—you.

And we need readers to show up for us big time—again.

Getting just 10 percent of the people who care enough about our work to be reading this blurb to part with a few bucks would be utterly transformative for us, and that's very much what we need to keep charging hard in this financially uncertain, high-stakes year.

If you can right now, please support the journalism you get from Mother Jones with a donation at whatever amount works for you. And please do it now, before you move on to whatever you're about to do next and think maybe you'll get to it later, because every gift matters and we really need to see a strong response if we're going to raise the $253,000 we need in less than three weeks.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate