A Fair Fight: Entrepreneurship and Competition Policy

Bottom Line: Low start-up rates, which still haven’t recovered from the Great Recession, hurt entrepreneurs, consumers, and the economy through less job creation, higher prices, and less innovation. Targeting barriers to economic competition such as non-compete clauses, occupational licensing, broad patents, and other rent-seeking measures can help boost the level of new firms. 

New firm formation has struggled to recover to pre-recession levels. Legacy firms, which are the most profitable, are consolidating profits. Industries that used to be represented by tens of firms have shrunk to just a handful. 

Policymakers must protect equality of opportunity, not preserve a firm’s market power. There are three main areas in which competition should be restored:  

1. Labor Markets — A competitive and fluid labor market allows entrepreneurs to allocate worker skills in the most productive way. Yet, workers are not switching jobs as frequently, reducing labor-market dynamism, and preventing workers from finding the jobs where their skills would be most highly-valued. 

a. Non-compete clauses, which forbid would-be entrepreneurs from founding a business that competes with their employer, perpetuate this lack of new business formation. 

2. New Entrants — New firms create economic dynamism, spur growth, and increase general welfare, yet the U.S. economy is increasingly dominated by older businesses. Currently, 57 percent of employment occurs at firms established before 1980, which only comprise 17 percent of all firms.

a. Occupational licensing, which limits new firm entrants by requiring would-be entrepreneurs to take classes, pass tests, and pay fees before they can operate, are one cause of the low start-up rate. Often the occupational licensing authorities are “captured” by the legacy industry members who have a financial incentive to keep out new competitors.  

3. Innovation — Innovation is more likely to occur in a competitive market where opportunities to earn profits are up for grabs. 

a. Patents and other forms of intellectual property protection that are too broad dampen innovation of original technology. Patent litigation between 1990 and 2010 resulted in a $0.5 trillion loss in wealth.  

Policymakers must protect competition, not concentration. That means 1) limiting the scope, duration, geography, and eligibility of non-compete agreements; 2) examining whether occupational licensing protects the public from unqualified practitioners or just protects entrenched businesses from competition; 3) not favoring big businesses over small ones or old businesses over new ones; and 4) resisting rent-seeking that allows carve-outs or special privileges that help a single or select few businesses. 

Read the full report here.