Analyzing the Economic Effects of State-Level Regulation

Abstract

Existing research on the economic impacts of regulation largely focuses on federal or cross-country regulatory restrictions, but the problem of regulatory accumulation is expected to also occur at the state level. Public choice economics and market process theory offer insight into why regulations alter economic outcomes. Since regulations change the rules of the game and the payoffs that participants receive, looking beyond stated intentions to the way regulations motivate behaviors is critical. Markets are an entrepreneurially driven process characterized by changing conditions, but regulations can inhibit creative destruction and distort incentives. I use the novel State RegData dataset from the QuantGov platform, which analyzes state regulatory texts to provide measures of restriction counts and industry relevance. I estimate the effect of industry-relevant restrictions on business establishments and employment using two econometric models: a multivariate linear regression model with controls and a fixed-effects regression model. I find tentative results that a greater amount of regulation in states is associated with negative percent changes in establishments and employment. My study is a starting point for future investigations of the relationship between regulation and state-level economic outcomes.