The Cost of Inexperience
46 Pages Posted: 2 Oct 2015 Last revised: 13 May 2017
Date Written: September 30, 2016
Free market entry is vital in preventing concentration of market power and eliminating large deadweight losses. Yet, in recent years, studies show that newcomers are less successful than existing firms that have diversifies their products in the market. What might explain this phenomenon?
This Article unveils a regulatory catch 22. It reveals that although a regulation may be efficient in correcting a certain market failure, its distributional effects may create another. It exposes the degree to which “economies of experience” in regulation create significant disadvantages to newcomers and provide substantial advantages to old-timers. Being well-versed in their marketplace, old-timers possess knowledge, familiarity, and influence over the rulemaking process. New or “green” entities entering regulated market or dealing with a new rule face proportionally larger costs to obtain regulatory insight. Consequently, an anomaly exists when government choice may de facto hamper innovation and survival of newcomers, the same goals it seeks to promote.
To remedy this inconsistency, the Article suggests ways to offset these distributional asymmetries through the use of information cooperatives, regulatory sandboxes, and compensatory mechanisms. These solutions offer policymakers greater regulatory efficiency without resorting to deregulation.
Keywords: Economies of Scope, Age, Increasing Returns, Taxation, Regulation, Compliance Costs, Economic Growth, Regulatory Exclusions, Small Business, SBA
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