San Diego Law Review

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Law and economics scholars agree that business regulations have a disproportionately negative impact on entrepreneurship and innovation. It would be a significant problem indeed if the very nature of regulation inhibits this kind of growth and creativity. This view of the problem suggests that the only way to increase innovation would be to decrease regulation.

Yet this view is too general. When examined more closely, all regulations are not created equal. Regulations can be formulated as rules or standards, and they can be simple or complex. Moreover, some rules are easily understood by computers and are thus suitable for automated processes. Different types of rules have different impacts on entrepreneurship and innovation.

This Article is based on interviews with over one hundred startups regarding the impact of regulation on innovation. It identifies six cases of startups that invented ways to make certain kinds of regulations relatively affordable for many small businesses to comply with.

These new uses of technology are examples of “regulatory democratization” because they open access to regulated industries for small business. Regulatory democratization increases competition and levels the playing field between small and large firms in highly regulated industries.

Regulatory democratization sheds new light on other proposals that are intended to spur entrepreneurial innovation. Regulatory sandboxes—where regulators give select companies the freedom to operate beyond regulatory boundaries—may counterintuitively inhibit innovation by preferencing large firms over small ones. Tax credits for entrepreneurs, on the other hand, can be designed to drive innovation. The key takeaway is that regulations can be smarter and more compatible with entrepreneurial innovation.

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