The Interdependence of Hierarchical Institutions: Federal Regulation, Job Creation, and the Moderating Effect of State Economic Freedom

TL;DR

This paper examines how regional economic freedom moderates the negative impact of national regulation on job creation in the U.S., revealing that higher economic freedom lessens regulation's harm, especially for older firms.

Contribution

It develops a theory of hierarchical institutional interdependence and empirically demonstrates how regional economic freedom moderates regulation's effects on job creation.

Findings

Regulation reduces net job creation.

Economic freedom weakens regulation's negative impact.

Older firms benefit from economic freedom's moderation.

Abstract

Regulation is commonly viewed as a hindrance to entrepreneurship, but heterogeneity in the effects of regulation is rarely explored. We focus on regional variation in the effects of national-level regulations by developing a theory of hierarchical institutional interdependence. Using the political science theory of market-preserving federalism, we argue that regional economic freedom attenuates the negative influence of national regulation on net job creation. Using U.S. data, we find that regulation destroys jobs on net, but regional economic freedom moderates this effect. In regions with average economic freedom, a one percent increase in regulation results in 14 fewer jobs created on net. However, a standard deviation increase in economic freedom attenuates this relationship by four fewer jobs. Interestingly, this moderation accrues strictly to older firms; regulation usually harms young firm job creation, and economic freedom does not attenuate this relationship.