The Negative Impact of Barriers to Entry on Income Inequality
By Dallin Overstreet
Abstract: Barriers to entry such as fees, licensing, or educational requirements, make it more difficult to start businesses in many countries. Problematically, many barriers to entry are due to regulatory capture and only serve to benefit incumbent firms and businesses. These regulations created and enforced by the government often make it difficult for low-income individuals to start new businesses or new careers in many industries. By discouraging or even denying individuals access to higher paying occupations, barriers to entry tend to increase income inequality. In this analysis, I estimate empirically the effect that barriers to entry have on income inequality. I use data produced by the World Bank’s Doing Business Index to determine how easy it is to start a business in each country. The Gini coefficient is a measure of the amount of income inequality in a country and is used to determine the effect that entry regulations have on income inequality. The dataset contains observations from 2012 to 2019 for 180 countries. Results show a 1-point increase in the ease of starting a business score translates to a 1.05-point decrease in the Gini coefficient. Similarly, a one-standard deviation increase in the starting a business score equates to a 13.4-point decrease in the Gini coefficient. Thus, I conclude barriers to entry have a negative impact on income inequality and tend to cause more inequality in countries in which they are instituted.
Introduction
Barriers to entry, including educational requirements, occupational licensing, start-up fees, and other government regulations, often make it difficult for new companies or individuals to enter any given market. There exist both natural and artificial barriers to entry. Natural barriers to entry may include high set up costs, high research and development costs, or ownership of a key scarce resource for the industry. Artificial barriers to entry could include government regulation like educational and licensing requirements, or exclusive contracts or patents.
