An Empirical Investigation of Firms' Responses to Minimum Standards Regulations

27 Pages Posted: 11 Mar 1998 Last revised: 6 Oct 2010

See all articles by Tasneem Chipty

Tasneem Chipty

Ohio State University

Ann Dryden Witte

Wellesley College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1997

Abstract

We study firms' responses to minimum standards and other forms of regulatory intervention on both the probability of exit and the distribution of observable product quality, using firm level data for a nationally representative sample of markets. Our empirical work is motivated by the literature on quality and price competition in the presence of minimum standards. We find that minimum standards increase the probability that firms exit certain markets. Moreover, we find that exit can cause both the average and the maximum quality observed in the market to decline. This perverse regulatory effect occurs when excessively high standards cause high quality firms to exit. When minimum standards do not lead to exit, minimum standards can increase the average and maximum quality of products in the market. Such standards can not only force low quality firms to raise their quality, but may cause high quality firms to increase quality, presumably in an attempt to alleviate price competition and differentiate themselves from their now higher quality rivals.

Suggested Citation

Chipty, Tasneem and Dryden Witte, Ann, An Empirical Investigation of Firms' Responses to Minimum Standards Regulations (July 1997). NBER Working Paper No. w6104, Available at SSRN: https://ssrn.com/abstract=54960

Tasneem Chipty (Contact Author)

Ohio State University ( email )

410 Arps Hall
Columbus, OH 43210-1172
United States
614-292-2051 (Phone)
614-292-3906 (Fax)

Ann Dryden Witte

Wellesley College - Department of Economics ( email )

106 Central Street
Wellesley, MA 02181
United States
781-283-2163 (Phone)
781-283-2177 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
34
Abstract Views
1,063
PlumX Metrics