Does Size Matter? An Economic Analysis of Small Business Exemptions from Regulation Exemptions from Regulation
Citation: C. Steven Bradford Does Size Matter? An Economic Analysis of Small Business Exemptions from Regulation Exemptions from Regulation.
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Small business (or transaction) exemptions from regulation are ubiquitous, lack of literature on impacts. Literature review of regulatory costs finds economies of scale in regulatory compliance, particularly for regulations with fixed costs of compliance, and finds that economies of scale persist over time rather than being short term adjustments to new regulation. The benefit of regulation is variable, scaling with size. Author models this and shows that small business/transaction exemptions are efficient, even when benefits and costs have a nonlinear relationship. If regulation involves zero fixed costs (not very realistic, e.g. due to information costs), efficiency of exemption depends on specific cost and benefit curves of regulation. Tiering (as opposed to exempting) regulation based on size obtains the same result: efficiency of lesser regulation for small size. However, introducing transaction costs into the model makes the result less clear: exemptions themselves introduce transaction costs. Similarly cumulative effects of small exemptions across regulations are efficient not considering transaction costs, but ambiguous considering transaction costs. Economies of scope are another consideration for cumulative effects (e.g. costs or benefits across regulations may be complements).