Regulatory Costs and Market Power

83 Pages Posted: 24 Feb 2023

See all articles by Shikhar Singla

Shikhar Singla

London Business School - Department of Finance; Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin)

Date Written: February 23, 2023

Abstract

Industry concentration and markups in the US have been rising over the last 3-4 decades. However, the causes remain largely unknown. This paper uses machine learning on regulatory documents to construct a novel dataset on compliance costs to examine the effect of regulations on market power. The dataset is comprehensive and consists of all significant regulations at the 6-digit NAICS level from 1970-2018. We find that regulatory costs have increased by $1 trillion during this period. We document that an increase in regulatory costs results in lower (higher) sales, employment, markups, and profitability for small (large) firms. Regulation driven increase in concentration is associated with lower elasticity of entry with respect to Tobin's Q, lower productivity and investment after the late 1990s. We estimate that increased regulations can explain 31-37% of the rise in market power. Finally, we uncover the political economy of rulemaking. While large firms are opposed to regulations in general, they push for the passage of regulations that have an adverse impact on small firms.

Keywords: Market Power, Competition, Concentration, Machine Learning, Regulations

JEL Classification: L51, L11, C45, D4

Suggested Citation

Singla, Shikhar, Regulatory Costs and Market Power (February 23, 2023). LawFin Working Paper No. 47, Available at SSRN: https://ssrn.com/abstract=4368609 or http://dx.doi.org/10.2139/ssrn.4368609

Shikhar Singla (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin) ( email )

Theodor-W.-Adorno-Platz 3
60629 Frankfurt am Main
Germany

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