Studies in Regional Economic Development
New Horizons in Regional Science series
Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough
Chapter 13: Business regulation and red tape in the entrepreneurial economy
High-quality institutions are fundamental for firms and individuals that make important decisions. The decision to become an entrepreneur is no exception. One aspect of interest for both incumbent firms and potential entrants is the body of regulations associated with starting and running a business. Many business regulations are necessary for securing a safe and well-functioning market. In other cases, the benefits of upholding these regulations are more questionable if the costs of complying with these regulations are considered in relation to the benefits. What are the costs for society associated with business regulations that are too extensive? The potential welfare loss in society occurs at three levels. First, the government has to bear costs associated with creating, upholding and controlling business regulations. Second, there are direct compliance costs for incumbent firms which need to spend resources on, for example, administration. Finally, there are indirect costs associated with excessive business regulation. Resources spent on complying with business regulations may have alternative and more efficient uses. Alternative and more efficient uses may be, for example, investments or innovative activities. Among the indirect costs, we also have to consider that extensive business regulations may inhibit potential entrepreneurs from starting their business. This indirect cost associated with business regulation-particularly the effect on entrepreneurship-is the focus in this chapter.
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