Small business response to regulation: incorporating a behavioral perspective

The use of behavioral economics in policy-making and public administration has neglected the heuristics that affect those who must comply with regulations. These heuristics affect the decision to comply with a regulation, and therefore they affect the effectiveness of regulations, and more generally the attitude of the regulated community toward government. In a survey and in interviews, small business owners described their compliance activities and their attitudes toward government. The business owners demonstrated the availability heuristic in their hatred of paperwork requirements, the bandwagon effect in seeking out reinforcement of negative reactions toward regulation, the anchoring of attitudes in particularly unpleasant interactions with government, and the impact of their economic well-being on their reaction to regulation. They also demonstrated the ineffectiveness of some information disclosure requirements. Incorporation of these behaviors and heuristics into the evaluation and enforcement of regulation may improve compliance and business relations with regulatory agencies.

Stuart Shapiro, Debra Borie-Holtz