Deregulation: Why We Should Sometimes Welcome Even Low-Quality Firms

29 Pages Posted: 28 Mar 2023

Multiple version iconThere are 2 versions of this paper

Date Written: March 20, 2023

Abstract

The quality of newly invented goods or services can only be assessed after they have been in use for a significant period. This applies to both high-quality and low-quality products---typically, the former survive, whereas the latter become obsolete in the market, resulting in resource wastage. We investigate this situation by developing a general equilibrium model. In a competitive market equilibrium, when the entry cost is relatively high compared to the research and development costs, only high-quality firms enter the market, ensuring efficiency. However, when the entry cost is low, low-quality firms enter the market, resulting in inefficiency. In this case, although entry regulations may exclude low-quality firms, they also reduce market competition and increase labor cost, leading to the decrease in economic welfare.

Keywords: General Equilibrium, Innovation, Regulation

JEL Classification: O30, O31, L52

Suggested Citation

Oura, Asuka, Deregulation: Why We Should Sometimes Welcome Even Low-Quality Firms (March 20, 2023). Available at SSRN: https://ssrn.com/abstract=4393284 or http://dx.doi.org/10.2139/ssrn.4393284

Asuka Oura (Contact Author)

Daito Bunka University ( email )

Japan

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