November 2, 2021

Industry Size and Regulation: Evidence from US States

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What explains variation in the degree of regulation across US states and industries? We examine cross- sectional variation in state government regulation facing 81 3-digit North American Industry Classification System industries by matching novel data on regulatory restrictions at the state-industry level with data on state-industry characteristics. For most states, an increase in industry size is positively correlated with the extent of regulation. Additionally, for most industries, there is also a positive correlation between industry size and the degree to which state governments regulate that industry. When we control for unobserved heterogeneity at the state and industry levels, we find the extent of industry-level regulation is robustly correlated with the size of the industry. However, other industry factors, like average wages, average establishment sizes, or the distribution of establishment sizes, are uncorrelated with the extent of regulation. Taken as a whole, our findings are consistent with hypotheses for regulation that emphasize the fixed costs of establishing regulation or the salience of large industries and are inconsistent with hypotheses that suggest that regulation is influenced by firm size or industry-level concentration of establishment sizes.