Industry size and regulation: Evidence from US states

What explains variation in the extent of regulation across US states and industries? We examine cross-sectional variation in state government regulations facing 81 three-digit North American Industry Classification System industries by matching novel data on regulatory restrictions at the state-industry level with data on state-industry characteristics. For most states, an increase in industry size is positively correlated with the extent of regulation. Additionally, for most industries, a positive correlation is found between industry size and the degree to which state governments regulate that industry. When we control for unobserved heterogeneity at the state and industry levels, we find that the extent of regulation is correlated robustly with the size of the industry. However, other industry-level factors, like average wages, average establishment sizes, the distribution of establishment sizes, the number of workplace accidents, and toxic emissions, are uncorrelated with the extent of regulation. Taken as a whole, our findings are consistent with hypotheses for regulation that emphasize the fixed costs of establishing regulation, the political salience of large industries, and the possibility that larger industries are more attractive targets for regulatory rent-extraction.