The heavy hand of regulation and the hidden cost of information

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In his presidential address to the American Economic Association, Avinash Dixit (2009) notes that laws and regulations are necessary for security of property rights, enforcement of contracts and overcoming collective action problems – something that the private sector cannot function without. However, laws and regulations are unlikely to have much beneficial effect if private agents are simply not aware of them. How easy is it for firms to obtain information on laws and regulations? What are the sorts of factors that determine this level of ease?
These are important questions that have received virtually no attention in the literature. One exception is Amin (2008). This study uses data for 50 countries from the World Business Environment Survey (WBES, 1999, World Bank). The survey asked managers to respond on a 1 (fully disagree) to 6 (fully agree) scale to the following statement: “In general, information on the laws and regulations affecting my firm is easy to obtain.”

Some interesting findings in this study are as follows. About 50% of the firms reported that information was easily available in most or all cases while 15% reported the opposite. The rest were in between. The most noticeable difference is between government owned and private firms, with the former having much better access to information than the latter. This difference has important implications for better information dissemination following privatization efforts.

As expected, heavier regulation of businesses significantly increases the difficulty that firms face in obtaining information and this holds even if we control for differences in per capita incomes, firm-size, etc. This is an added cost of regulation that has escaped attention so far. Access to information is significantly better in smaller countries and for larger firms. Somewhat surprisingly, better political rights and lower corruption that are normally associated with greater government transparency show no effect on information availability. That is, availability of information on laws and regulations and transparency related issues are governed by different sorts of factors. The study also reports no effect of religion and political institutions such as presidential vs. parliamentary systems.
While the study does not unearth the causal factors driving information availability, it does highlight the sorts of countries and firms that are most in need of better dissemination of information. Policy makers can start by focusing on these target groups while future research can focus on the causes and consequences of information flows to the private sector.


Mohammad Amin

Private Sector Development Specialist

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