The growth-maximizing level of regulation: Evidence from a panel of international data

Abstract

Existing evidence suggests that regulation diminishes economic growth. In theory, however, regulation may be either growth-enhancing or diminishing. We therefore empirically revisit the relation between regulation and growth, allowing for both positive and negative effects. In an unbalanced panel of 132 countries over eight time periods, we find evidence of a hump-shape relation between regulation and growth. The estimates imply that for more than 95% of the sample the total effect of regulation on growth is positive. The estimates also imply that about 60% of the sample observations are associated with over-regulation, relative to the growth-maximizing level. Similar findings apply to the (majority) subsample of non-OECD nations in the dataset. However, for the (minority) subsample of OECD nations, both the total and marginal effects of regulation on growth are negative.