RAND Study Examines the Effect of Policy on Entrepreneurship and Small Businesses

For Release

December 11, 2007

An improved understanding of the effects of regulation on small businesses will help lawmakers develop policy designed to advance entrepreneurship, according to a new RAND Corporation report.

The Kauffman-RAND Institute for Entrepreneurship Public Policy report provides an overview of the ways that regulation and the legal system can discourage or encourage the entrepreneurial spirit. It also examines how specific regulations in four key areas — health insurance, workplace safety, corporate governance and business organization — have affected small business.

Small businesses (those with fewer than 500 employees) are an important feature of the U.S. political and economic landscape, accounting for almost half of all gross revenues generated by U.S. business, employing half of all private-sector workers and generating 60 percent to 80 percent of net new jobs.

“It is vital to consider how the legal and regulatory environment influences small businesses and the ways in which that influence differs from that on large businesses,” said Susan Gates, director of Kauffman-RAND Institute.

“Unfortunately, some regulations place a disproportionate burden on small businesses,” said Gates, a senior economist at RAND, a nonprofit research organization. “At the same time, exemptions and other special regulatory treatment for small businesses designed to ease this burden don't always work.”

Studies from the first three years of the of Kauffman-RAND Institute's research are summarized in the new report, “In the Name of Entrepreneurship? The Logic and Effects of Special Regulatory Treatment for Small Businesses.”

The report finds that the regulatory environment affects small business differently from the way it affects large ones, sometimes leading to unintended negative consequences.

For example, the research found no evidence that state health-insurance mandates designed to expand access to health insurance for small businesses have actually increased their ability to offer benefits or reduced their insurance premiums.

Moreover, the study provides evidence that some small businesses added an employee or two in order to avoid having to purchase health insurance in the more highly regulated market that was intended to benefit these very businesses.

Researchers found that regulations can have both positive and negative effects on smaller businesses, and that regulations are not always systematically bad for entrepreneurs. For example, a review of the evidence on the response of large and small businesses to the Sarbanes-Oxley Act suggests that it has had a mixture of positive and negative effects on small businesses.

Research from the Kauffman-RAND Institute for Entrepreneurship Public Policy suggests possible directions for future policy that achieves a better balance between the interest in restricting business behavior through regulation and the desire to encourage small businesses and entrepreneurs.

For example, one study summarized in the report suggests that health and safety enforcement efforts, rather than treating all small establishments in the same way, might instead target the riskiest small enterprises. The study suggests regulators focus on medium-sized businesses (20 to 999 employees), which were found to have the highest rate of fatal workplace accidents among small establishments.

The purpose of the Kauffman-RAND Institute for Entrepreneurship Public Policy is to evaluate legal and regulatory policymaking related to businesses and entrepreneurship. The Kauffman-RAND Institute for Entrepreneurship Public Policy falls within the RAND Institute for Civil Justice, a research program within the RAND that is dedicated to improving private and public decision making on civil legal issues by supplying policymakers and the public with the results of objective, empirically based, analytic research.

The Ewing Marion Kauffman Foundation of Kansas City is a private, nonpartisan foundation that works with partners to advance entrepreneurship in America and improve the education of children and youth. The Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman. Information about the Kauffman Foundation is available at www.kauffman.org.

Other authors of the report are Kristin J. Leuschner, Lloyd Dixon, Kanika Kapur, Seth A. Seabury, Eric Talley, Pinar Karaca-Mandic, John Mendeloff, Christopher Nelson, Kilkon Ko, Amelia Haviland, Ehud Kamar, John Romley and Bogdan Savych.

The report is available at www.rand.org.

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