Regulation and Technology-Driven Entry: Measurement and Micro-Evidence

Abstract

We use industry spending on "regulation-related tasks" to measure each industry's regulation intensity. Applying this measure to manufacturing industries, we find that increased regulation intensity is associated with higher production cost and lower growth at incumbents, but increased entry. We develop a model in which entrants face lower costs than incumbents in adopting new production technologies. Regulation raises the operating cost of current technology more than new technologies and thereby encourages entry. Using establishment-level data, we find supporting evidence that when industry regulation is more intense, entrants use more advanced technologies, spend less on regulation, and survive longer, as compared to incumbents.

Keywords: Regulation, Entry, Technology Adoption, Regulation-Related Tasks, Sarbanes-Oxley, Dodd-Frank

JEL Classification: D22, G28, G38, K2, L5, L26