Big companies love the regulations their small rivals cannot afford

Picture the scene. A senator stands at a microphone, flanked by the chief executive of the biggest company in the industry, and announces that this brave corporation has come to Washington to beg for tougher regulation of itself. The cameras click. The coverage calls it "unprecedented corporate responsibility." Nobody in the press row asks the only question that matters, which is what the company expects to get out of it.

Folks, I will answer it for them. When the biggest firm in a market asks to be regulated, it has run the numbers. It has counted its lawyers, its compliance staff and its lobbyists, and it has counted the lawyers, compliance staff and lobbyists of the little outfit that is eating its lunch. The little outfit has none. A new rulebook is not a burden to the giant. It is a moat, and the giant is the one holding the drawbridge.

That is the argument of this post, and it is not a conspiracy theory. It is one of the best-documented findings in the whole field of economics, and it has been understood for more than fifty years. The liberal view is that business hates regulation and government stands between the corporation and the public. The truer view is that business hates competition, and regulation is often the most reliable way to get rid of it.

The claim in plain English

Let me define terms, because the whole debate turns on them.

Regulation here means a rule backed by the force of law that governs how a business may operate: what it must disclose, what it must test, what licences it must hold, what records it must keep.

Compliance cost is what it takes to obey the rule: lawyers, software, auditors, consultants, staff hours, and the delay while all of that happens.

Regulatory capture is what happens when an agency or a rulebook ends up serving the interests of the industry it was created to police, instead of the public it was created to protect.

The claim is simple. Many compliance costs are fixed. They do not shrink in proportion to the size of the company. A rule that costs the same to satisfy whether you have ten employees or ten thousand weighs very little on the company with ten thousand and a great deal on the one with ten. When the rule arrives, the large firm absorbs it and the small firm either pays and shrinks its margin, merges into someone bigger, or does not open at all.

A worked example, clearly labelled as hypothetical

Here is a made-up industry so the arithmetic is out in the open. It is a hypothetical. The numbers are chosen for easy division, not taken from any real company.

Suppose a new rule requires every firm in an industry to hire one full-time compliance officer and to buy a reporting system. Together, that costs $200,000 a year, no matter how large the firm.

• A giant with $2 billion in annual revenue pays $200,000. That is 0.01 percent of its revenue. $200,000 divided by $2,000,000,000 is 0.0001.
• A start-up with $2 million in annual revenue pays the same $200,000. That is 10 percent of its revenue. $200,000 divided by $2,000,000 is 0.10.

Same rule, same bill, and a burden one thousand times heavier on the little guy. The giant's board does not notice it. The start-up's founder is looking for a buyer.

Now follow the idea one step further than its fans do. If one compliance officer is good for the public, the logical next rule is a team of them, with a certification, an annual audit and a mandatory consultant. Every step lowers the giant's relative cost and raises the little one's. A company that wanted fewer competitors could not design a better program if it sat down with a pencil, and in practice that is roughly what happens, because the company's lawyers are in the room when the draft is written and the start-up's founder is at the shop, trying to make payroll.

Stigler, 1971: the regulated industry shops for its regulator

In 1971 the economist George Stigler published "The Theory of Economic Regulation" in the Bell Journal of Economics and Management Science. He later won the Nobel Prize in economics, in 1982, for his work on industrial structure and the functioning of markets and the causes and effects of public regulation.

Stigler's thesis was blunt. The textbook story said regulation was designed to protect the public from monopoly and abuse. Stigler asked the question the textbook skipped: who actually demands regulation, and what do they get? His answer was that regulation is a product. Like any product, it is sold to whoever values it most and can organize to buy it. A concentrated industry with a few large firms and a lot at stake can organize very cheaply. A diffuse public, whose members each have a few dollars riding on the outcome, cannot.

So, Stigler argued, as a rule regulation is acquired by the industry and is designed and operated primarily for its benefit. He pointed to the tools an industry wants from the state: direct subsidies, controls over the entry of new rivals, controls over substitutes and complements, and price-fixing. Notice the second item. Control over the entry of new rivals is the one the incumbent wants most, and a licensing regime or a compliance regime delivers it without anyone having to say the word "monopoly."

This is also why I find the capture theory more persuasive than the rival claim that the regulators are simply foolish. A fool would be wrong in random directions. Captured regulators are wrong in one direction, the direction that happens to protect the firms in the room.

Bootleggers and Baptists, 1983

Twelve years after Stigler, the economist Bruce Yandle added the piece that explains why this keeps working in a democracy. In 1983 he published "Bootleggers and Baptists: The Education of a Regulatory Economist" in the magazine Regulation. His example came from the old Sunday closing laws for liquor.

Who wanted liquor stores shut on Sunday? The Baptists did, sincerely, on moral grounds. And so did the bootleggers, who sold illegal whiskey and were delighted to have the legal competition locked out for a day. The Baptists gave the law its public respectability. The bootleggers gave it its political muscle and its financing. Neither group had to like the other, and neither had to admit its real motive.

Yandle's lesson is that a successful regulation needs both a public-interest story and a private-interest beneficiary. When a bill arrives with an environmental, safety or consumer-protection story and an incumbent industry quietly cheering in the back row, you are looking at a bootlegger-and-Baptist coalition. I am not saying the Baptists are insincere. I am saying that the bootlegger's money has a way of choosing which sincere Baptists get the microphone.

Three exhibits

Exhibit one: the community bank. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed on July 21, 2010, in response to the financial crisis. The crisis was caused largely by large institutions, and the law was sold as a way to rein them in. Large institutions did take on new rules. They also had the legal departments and compliance staffs to absorb thousands of pages of them. The small community bank, the one with a handful of loan officers and a part-time compliance person, did not.

In the years that followed, the number of small community banks fell, and fewer new banks opened than before the law. I will not give you a count from memory, because the exact numbers matter and you should get them from the source: the FDIC publishes the number of insured institutions in its quarterly reports, and you can look at the decline yourself. The mechanism is not in dispute among serious people. Fixed compliance costs fall harder on small banks, and some of them sold to larger ones rather than pay for the staff the new rules demanded. Supporters of the law argue that other forces were also at work, among them low interest rates, consolidation that was already under way, and the aftermath of the recession itself, and they are right that it is not the only cause. I would ask them in return how a law sold as a check on the largest institutions ended up making the largest institutions' position safer.

Exhibit two: tobacco. On June 22, 2009, President Obama signed the Family Smoking Prevention and Tobacco Control Act, which gave the Food and Drug Administration authority to regulate tobacco products. You would expect cigarette makers to have fought it to the last ditch, and some of the industry did. But Philip Morris, the maker of Marlboro and by far the market leader, supported the legislation publicly.

Why? Think like a bootlegger. Critics argued that the law's limits on marketing and promotion would make it harder for a challenger to win customers away from the established leading brand. If you cannot advertise, you cannot introduce yourself, and the brand everyone already knows is the one that keeps the shelf. The law also grandfathered tobacco products that were already on the market before 2007, which led some opponents to nickname it the "Marlboro Protection Act." The company with the biggest market share had the most to gain from freezing the market where it stood. Public-health groups gave the bill its moral story, and the market leader got what it wanted. That is Yandle's theory in one signing ceremony.

Exhibit three: the licensing board. Throughout the economy, occupational licensing laws are written, and boards are staffed, by people who already work in the field. That is a recipe for rules that protect incumbents. I have written separately about North Carolina's dental board, teeth whitening and the Supreme Court, where a board of dentists tried to push teeth-whitening competitors out of the market, and about arizona's universal license recognition and the case for copying it, which shows one state's way out.

The strongest objection: big business always opposes rules

Let me state the other side fairly, because it is not a silly point. Business lobbies against regulation constantly. Trade associations fight rules on emissions, labelling, workplace standards and a hundred other things, and often they are right to fight. Many large firms do oppose many specific regulations, and some of the biggest lobbying campaigns in history have been aimed at stopping rules, not passing them. If regulation were always a gift to incumbents, you would not see so much money spent to resist it.

I accept every word of that, and here is why it does not defeat the argument.

One, the claim I am making is not that business always wants regulation. It is that business wants advantage, and it will take regulation or deregulation depending on which one delivers it. A giant that fights a rule that would bind it, and supports a rule that would bind its rivals harder, is behaving consistently.

Two, opposition is not uniform. Different firms in the same industry frequently lobby on opposite sides of the same bill, and when they do, ask which way the largest one is leaning and which way the newest one is. In my experience of the record, the split often runs along size.

Three, the objection proves the point about selective resistance. Firms fight the rules that cost them more than they cost their rivals. They accept, or sponsor, the rules that cost their rivals more. You cannot tell which is which by reading the press release. You can tell by reading the compliance schedule.

The numbered argument

Let me put it in order, because the structure matters.

1. Many regulatory costs are fixed, so they fall as a smaller share of revenue on large firms than on small ones.
2. Entry by new firms is the main discipline on established firms. A market in which nobody can enter is a market in which the incumbents can raise prices and relax.
3. Therefore a rule that raises the fixed cost of operating raises the barrier to entry, and the firms that gain most from a higher barrier are the ones already inside.
4. Those firms have the resources and the incentive to organize politically for such rules, as Stigler showed, and the cover of a public-interest story to do it, as Yandle showed.
5. Therefore the existence of a regulation, and even the support of the regulated industry for it, tells you nothing reliable about whether the public is better off. You have to look at who is excluded.

That fifth point is where a conservative should be most careful. We are not against rules. A free market runs on rules: contracts enforced, fraud punished, property protected. The question is whether a particular rule serves the customer or the incumbent, and the test is simple. Does it make it easier or harder for a stranger with a better idea to open next door?

What the Founders would make of it

This is an old worry, and it appears in the Founding. In Federalist No. 10, James Madison wrote about the danger of faction, which he described as a number of citizens, whether a majority or a minority, united by a common interest adverse to the rights of other citizens or to the permanent and aggregate interests of the community. A faction that captures the lawmaking process to wall off its competitors fits his definition exactly. Madison's remedy was an extended republic with many competing interests, so that no single one could dominate. Washington's regulatory apparatus does the opposite: it concentrates the decisions in a few agencies where the best-organized interest wins.

It also explains why conservatives should be wary of the answer that "we just need smarter regulators." The regulator is not a philosopher-king standing above the market. The regulator is a person with a career, who meets the industry's lawyers every week and hears from the start-up never. I covered the same pattern on the tax side in tax complexity is a subsidy for lobbyists, and the code shows how it works, and in the burden on the small employer in the regulation bill a ten-person company pays that a giant can shrug off.

Bailouts are the same game at the scale of a whole sector. Once a firm is large enough that the government cannot let it fail, it receives an implicit guarantee that its smaller rivals do not, and it borrows more cheaply as a result. I walked through that in Bailouts and moral hazard, from Chrysler in 1979 to Silicon Valley Bank. Regulation and rescue come from the same cabinet: protection for the well-connected, red tape for everyone else.

And there is the matter of who writes the rules. When Congress passes a broad statute and hands the details to an agency, the details are where the industry's lawyers do their work. The deeper reason this happens is the delegation of lawmaking power itself, which I discuss in The Sick Chicken Case of 1935 and the Doctrine That Could Rein In Agencies. You can see the scale for yourself on the red tape page, where the volume of federal rulemaking is laid out. The Federal Register published 2,441 final rules in 2025 and 3,248 in 2024. Ask yourself who has the staff to read all of them.

What conservatives should propose

I do not want to end with a lament. Here is what follows if you take this seriously.

• Exempt small firms by design. Rules that matter can carry thresholds, so that the smallest businesses get lighter reporting, longer deadlines or plain-language compliance. A rule that cannot survive an exemption for a ten-person firm is telling you something about its real purpose.
• Count the entry cost. Every proposed rule should carry an estimate of what it costs a new entrant, in dollars and in months, next to what it costs the incumbent.
• Sunset and review. A rule with an expiry date has to be defended again, in the open, by people who have to explain who it helps.
• Supervise the boards. Where the people who vote on the rules are the people who profit from them, someone outside the trade should be able to say no.
• Read the company's own testimony. When a big firm asks for regulation, treat it the way you treat a store that asks for a lower tax on its own product: ask what is in it for them.

There is a joke in all this that is not much of a joke. The people who say they want to rein in big business are often the ones who write the largest checks to its lawyers. Every new rule is a full-employment act for the compliance industry, and the firm that can afford a thousand compliance officers wins the market against the one that can afford none. That is not a free market, and it is not socialism either. It is something older and less honest: a guild, with a press office.

The case in brief

1. Many compliance costs are fixed, so the same rule is a rounding error for a giant and a crisis for a start-up.
2. George Stigler showed in 1971 that regulation is often sought by, and designed for, the industry it regulates, and Bruce Yandle showed in 1983 how a public-interest story and a private-interest beneficiary together pass the bill.
3. Dodd-Frank's burden on community banks and the tobacco industry's backing of FDA regulation in 2009 are two modern illustrations of the pattern.
4. Big business does oppose some rules, but it opposes the ones that cost it more than its rivals and welcomes the ones that cost its rivals more, so the right test is who gets excluded.
5. Conservatives defend rules that protect contracts, property and honest dealing, and distrust rules that protect incumbents from the stranger with a better idea.

What you can do: the next time your state or a federal agency proposes a rule in your industry or your town, read the public comment docket and see which comments came from large firms and which from small ones, then file one of your own.