Wednesday, December 09, 2009

Another Question I Should Have Asked in Econ 307: Optimal Firm Size

Firms with ten or more employees are subject to regulation by the Occupational Safety and Health Administration. Firms with employee hours worked in a year exceeding 20,000 hours must report emissions of a long list of chemicals to the EPA's Toxic Release Inventory. Other regulations and taxes, such as Unemployment Compensation, begin with the first employee. In an interview I just heard on NPR, the interviewee said that firms with ten or more employees must buy workers' compensation insurance.

What effects should we expect these regulations to have on firm size, and (leaving aside the value or harm of the regulation's direct effect) is this change in firm size efficient? You might think about Coase's 1937 paper, The Nature of the Firm.

Bonus question 1: What are some other regulations that have similar effects? (I don't know the answer to this one.)

Bonus question 2: Is there any empirical work that tries to estimate the effect of such regulations on firm size? (I don't know the answer to this one, either).

Bonus question 3 (for econometrics students): Where would you ideally look to test this, and how would you do it? (I think there is a clear "best answer" to this.)

If you have responses, feel free to post them in the comments.

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