Regulation and Income Inequality: The Regressive Effects of Entry Regulations

28 Pages Posted: 14 Nov 2016

See all articles by Patrick A. McLaughlin

Patrick A. McLaughlin

Mercatus Center at George Mason University

Laura Stanley

George Washington University - GW Regulatory Studies Center

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2016

Abstract

We examine the relationship between entry regulations and income inequality. Entry regulations increase the cost of legally starting a business relative to the alternatives — working for someone else, entering illegally, or exiting the labor force. We hypothesize that such regulations may cause greater income inequality, because entrepreneurs at the bottom rungs of the income distribution may have relatively greater difficulty surmounting costly barriers to entry. Combining entry regulations data from the World Bank Doing Business Index with various measures of income inequality, including Gini coefficients and income shares, we examine a pooled cross-section of 175 countries and find that countries with more stringent entry regulations tend to experience higher levels of income inequality. An increase by one standard deviation in the number of procedures required to start a new business is associated with a 1.5 percent increase in the Gini coefficient and a 5.6 percent increase in the share of income going to the top 10 percent of earners. Although we cannot eliminate the possibility of reverse causality, we are unaware of any theory that posits that income inequality causes entry regulations. We therefore offer several simple recommendations designed to minimize regulations’ adverse effect on income inequality.

Keywords: income inequality, regulation, regulations, entry regulations, Doing Business, Gini coefficient

JEL Classification: D31, J38, K20

Suggested Citation

McLaughlin, Patrick A. and Stanley, Laura, Regulation and Income Inequality: The Regressive Effects of Entry Regulations (January 20, 2016). MERCATUS WORKING PAPER, 2016, Available at SSRN: https://ssrn.com/abstract=2869155 or http://dx.doi.org/10.2139/ssrn.2869155

Patrick A. McLaughlin (Contact Author)

Mercatus Center at George Mason University ( email )

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HOME PAGE: http://www.patrickamclaughlin.com

Laura Stanley

George Washington University - GW Regulatory Studies Center

Washington, DC
United States

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