Size-based regulations and firm growth: is small beautiful?

Luis Garicano, Claire Lelarge and John van Reenen

Rue de la Banque, 2017, issue 50

Abstract: Most countries treat smaller firms more generously when it comes to business regulation or taxation, exempting them from some of the burdens on larger firms. In France for example, a large number of regulations – primarily from labour laws, but not only – are binding when a firm has 50 or more employees. We calculate the overall costs of such regulations from observing companies’ response to these “taxes on firm size” and obtain that they may depress economic output by over 3% in French manufacturing industries. Their costs are likely to be passed on to workers in the form of higher unemployment rather than lower equilibrium wages when the latter are rigid. By subsidising small and low productivity firms at the expense of larger firms, they also contribute to depressing aggregate productivity.

Date: 2017
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