How costly are restrictions on size?

Abstract

We develop a simple framework to address government policies that restrict the size of establishments in a particular sector. The economy we study is a two-sector extension of the span-of-control model of Lucas [Lucas, R.E., 1978. On the size distribution of business firms. Bell Journal 9, 508-523]. In the model, production requires a managerial input, and individuals sort themselves into managers and workers. Since managers are heterogeneous in terms of their ability, establishments of different sizes coexist in equilibrium in each sector. We then study government policies that aim to change the size distribution of establishments in a given sector, such as Japan's Large Scale Retail Location Law. How costly are these policies? What is their impact on productivity, the number and size distribution of establishments? We find that these effects are potentially large. © 2005 Elsevier B.V. All rights reserved.