While a few large business corporations earn billions of rupees in profits each year, millions of smaller businesses struggle for their survival. Seeing such massive inequality in the fortunes of businesses, many go on to believe that government regulation is a must to end the domination of big businesses and encourage the growth of smaller ones. Such sentiments are common when it comes to the tech industry which is dominated by just a few large companies.
A recent paper, however, warns that regulators may actually be widening, instead of narrowing, the gap between big and small businesses through their rules.
In “Barriers to prosperity: the harmful impact of entry regulations on income inequality”, published in Public Choice , Dustin Chambers, Patrick McLaughlin and Laura Stanley study the impact that entry regulations have on income inequality. The authors use World Bank data regarding entry regulations in different countries and compare it to various measures of inequality to gauge the relationship between the variables. They find that countries with greater barriers against the entry of new businesses also witness greater levels of inequality. In terms of numbers, one standard deviation increase in the number of procedures to start a business causes an increase of 7.2% in the share of income that accrues to the top decile of income earners and a 12.9% increase in the country’s Gini coefficient.
The findings seem logical after one becomes aware of the unintended effects of government regulation. Entry regulations like licensing requirements, which are usually justified as necessary to uphold the common good, can make it harder for new businesses that are smaller in size to enter and compete against incumbent giants. This drastically reduces the number of opportunities available for the less fortunate to climb up the economic ladder by competing against existing large companies.
Conversely, entry regulations also make it easier for rich businessmen to stay on top for longer than they would otherwise. With the help of regulations, large businesses can afford to be complacent about the threat of new companies challenging their position of dominance. Thus, big businesses that are keen to avoid the threat of competition from smaller players are generally supportive of the idea of the government regulating the entry of new players into their industry.
