Too Small to Regulate

17 Pages Posted: 20 Apr 2016

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1, 2014

Abstract

The paper argues that to achieve compliance of firms with regulations such as product quality or environmental or health standards it is better to have industries with a few large corporations than numerous small firms. A model is constructed to show that limited liability constraints bind more easily in competitive industries, making it harder to impose sufficiently severe penalties and costlier to send sufficient monitors. Having large corporations allows the government effectively to delegate some of its monitoring functions to the managers of the corporation. The tradeoff between this issue and the usual argument in favor of competition is considered.

Keywords: Regulatory Regimes, Markets and Market Access, Water and Industry, Public Sector Corruption & Anticorruption Measures, Public Sector Regulation

Suggested Citation

Basu, Kaushik and Dixit, Avinash K., Too Small to Regulate (May 1, 2014). World Bank Policy Research Working Paper No. 6860, Available at SSRN: https://ssrn.com/abstract=2433813

Kaushik Basu

Cornell University - Department of Economics ( email )

414 Uris Hall
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IZA Institute of Labor Economics

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Brookings Institution ( email )

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Avinash K. Dixit

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
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609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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