Entrepreneurship and regulation: dynamics and political economy

Abstract

Three dynamic, descriptive models of the economy are studied in which entrepreneurship and regulation are interdependent. These models, adapted from population biology, capture Baumol's observation that economic regulations are used by entrepreneurs against entrepreneurs and therefore should be made an endogenous variable in a theory of the supply of entrepreneurship. The models differ in the number of competitive processes admitted, thus permitting comparative analyses. These models allow one to work out the general-equilibrium implications that are not always obvious at first sight. The implications, furthermore, are unambiguous and strong. Four striking implications are derived. First, competition among entrepreneurs for markets does not stimulate economic growth, but promotes economic freedom (i.e., the freedom from economic regulation). Second, competition among regulators for the administrative control of markets leads to faster economic growth and greater economic freedom. Third, these favorable effects also attend deregulation and greater resistance to new regulations. Fourth, the preferential financial treatment of innovations does not necessarily encurage innovations; it ultimately results in more regulation.