Does Size Matter? An Economic Analysis of Small Business Exemptions from Regulation

Abstract

The author examines whether exemptions for small businesses and small transactions that appear in many regulations are economically efficient. The cost of regulation has both variable and fixed components. As demonstrated by many empirical studies of regulatory compliance costs, the fixed costs of regulation, and some of the variable costs, are subject to economies of scale that benefit larger firms and larger transactions. Though it is harder to measure the benefits of regulation, the benefits of regulation generally vary in proportion to the size of the regulated firm or transaction. The author develops a mathematical model of how the costs and benefits of regulation vary with size and concludes that, no matter what assumptions one makes in constructing that model, it supports small business exemptions. However, when transactions costs, the cumulative effect of regulation, and other real-world issues are considered, the case for small business exemptions is more ambiguous.