The Schumpeterian Cost of Regulation on Entry and Innovation: The Case of Bail Bonds

40 Pages Posted: 9 Jul 2014 Last revised: 5 Sep 2014

See all articles by Erin Scott

Erin Scott

MIT Sloan School of Management

Anne Marie Knott

Washington University in St. Louis - John M. Olin Business School

Date Written: November 22, 2013

Abstract

Entrepreneurship is valued in part because it stimulates Schumpeter’s gale of creative destruction. A popular view, reinforced by recent empirical work on regulatory reform, is that regulation inhibits entrepreneurship and innovation. However dismantling regulation is ill-advised, since generally regulation has primary goals other than to increase innovation. We study the impact of regulation on entry and innovation in such a setting, the bail bond industry. We build structural models of the entrepreneur’s entry decision and the incumbent’s continuation decision, then employ recovered parameter estimates in counterfactual policy environments that allow us to compare the impact of different regulatory regimes. Results from this exercise indicate that a combination of entry and operating regulations reduces entry yet increases innovation relative to a setting with no regulation. These benefits are above and beyond the intended benefits of the regulations. Our results suggest it is possible to design regulations without imposing the Schumpeterian cost on innovation, and provide preliminary indications of how to accomplish this. Moreover our results suggest that Schumpeterian cost itself may need to be redefined. Entry and innovation actually oppose one another in our setting. Not only does excess entry steal share, in so doing it also suppresses incentives to innovate.

Keywords: entry, innovation, regulation

JEL Classification: L1, L5, O4

Suggested Citation

Scott, Erin and Knott, Anne Marie, The Schumpeterian Cost of Regulation on Entry and Innovation: The Case of Bail Bonds (November 22, 2013). Available at SSRN: https://ssrn.com/abstract=2463741 or http://dx.doi.org/10.2139/ssrn.2463741

Erin Scott

MIT Sloan School of Management ( email )

Cambridge, 117592
United States

Anne Marie Knott (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

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