An Empirical Investigation of Firms' Responses to Minimum Standards Regulations

Tasneem Chipty and Ann Dryden Witte

No 6104, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study firms' responses to minimum standards and other forms of regulatory intervention on both the probability of exit and the distribution of observable product quality, using firm level data for a nationally representative sample of markets. Our empirical work is motivated by the literature on quality and price competition in the presence of minimum standards. We find that minimum standards increase the probability that firms exit certain markets. Moreover, we find that exit can cause both the average and the maximum quality observed in the market to decline. This perverse regulatory effect occurs when excessively high standards cause high quality firms to exit. When minimum standards do not lead to exit, minimum standards can increase the average and maximum quality of products in the market. Such standards can not only force low quality firms to raise their quality, but may cause high quality firms to increase quality, presumably in an attempt to alleviate price competition and differentiate themselves from their now higher quality rivals.

JEL-codes: L15 L5 (search for similar items in EconPapers)
Date: 1997-07
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Children and Youth Services Review, Vol. 21 (April 1999): 111-146.

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