Scope and Methodology Economic theory predicts that environmental regulations deter the births of small establishments through resultant increases in the minimum efficient scale of plant operations. Regulations impose higher costs by requiring more complicated business administrative and operational activities. Regulations also create more difficult facility siting and permitting procedures. The mediated regression methodology allows for a determination of whether the barrier effects operated through an increase in industry minimum efficient scale or through other mechanisms. The data sources used in the study include the U.S. Small Business Administration's U.S. Establishment and Enterprise Longitudinal Micro Data file, and the U.S. Department of Commerce's Census of Manufacturers, Annual Survey of Manufacturers, Survey of Plant Capacity, and Report of Pollution Abatement Costs and Expenditures.
Small establishments are, however, likely to be independent firms.
Moreover, the robustness of the results of comparisons of small and large establishments refutes the notion that the results are biased by the chosen unit of analysis. The nature of the effect, however, changed over time. In 1977, the deterrent effect of environmental regulations operated exclusively through increases in the minimum efficient scale of production. In 1982 and 1987, increases in efficient scale accounted for only part of the deterrent effect of environmental regulations on small establishment births. The deterrent effect in these years shifted to other mechanisms such as the higher costs of increased business complexity and growing difficulties in siting and permitting of new facilities.