Small business response to regulation: incorporating a behavioral perspective

The study examines how small businesses perceive regulation and how those perceptions influence broader attitudes toward government and compliance behavior. Against the backdrop of intensified anti-regulation rhetoric in the United States—particularly salient in Midwestern states affected by manufacturing job losses—the authors explore which behavioral heuristics shape small business owners’ reactions to regulation. Using a survey of 322 small manufacturing businesses in the Midwest and eight follow-up interviews, the paper investigates the roles of availability (salience of paperwork), bandwagon effects (social and partisan reinforcement), anchoring (salient negative encounters), and mood-related self-serving biases in forming regulatory attitudes. The purpose is to illuminate behavioral drivers that may affect regulatory effectiveness and contribute to political polarization around regulation.

Traditional rational-actor models posit that compliance is driven by perceived stringency, likelihood and magnitude of sanctions (Kagan et al., 2003; Kagan and Scholz, 1984). Additional determinants include regulatory complexity and volume, inspector enforcement style, perceived fairness, knowledge/capacity, and organizational structure and culture, as well as community norms (Mandel and Carew, 2013; Bardach and Kagan, 1982; Makkai and Braithwaite, 1996; Kagan et al., 2003; Axelrad and Kagan, 2000; Howard-Grenville, 2006; Howard-Grenville et al., 2008). Behavioral economics demonstrates that heuristics and biases systematically shape judgments (Tversky and Kahneman, 1974; Kahneman, 2011) and has informed policy design (e.g., nudges) and analyses of regulators’ behavior (Sunstein, 2013; Viscusi and Gayer, 2015; Grimmelikhuijsen et al., 2017). However, there has been comparatively little attention to the behavioral responses of the regulated community, notably businesses, despite evidence that perceptions and process burdens (red tape) influence compliance and attitudes (Moynihan et al., 2015; Hattke et al., 2018; Rinfret and Pautz, 2018). The paper positions its contribution within this gap, mapping observed heuristics—availability, bandwagon effects, anchoring, and self-serving bias—onto small business regulatory perceptions.

The study employed a mixed-methods design focused on small manufacturing firms in seven contiguous Midwestern and nearby states: Indiana, Illinois, Michigan, Minnesota, Ohio, Pennsylvania, and Wisconsin. Phase 1 was a randomly conducted phone survey (with limited, discontinued email recruitment in Indiana and Pennsylvania due to low cooperation) fielded July–September 2017. The final sample comprised 322 small businesses (primary manufacturing sector by SIC), with quotas to ensure minimum observations by state; the sample was stratified by the proportion of small and large businesses, but after initial recruitment challenges in Indiana only small businesses were surveyed. Respondents were executives (managers, directors, owners, partners). The survey included measures of regulatory burden (e.g., time on compliance paperwork), perceived impacts of specific regulation types, regulatory attitudes via paired statements, information sources for new regulations, and perceptions of the state economy. Phase 2 consisted of in-depth qualitative interviews with eight survey respondents willing to participate (approximately 10% agreed to be contacted; each was called up to five times). Five interviews were conducted in person with site visits; three were by phone. A semi-structured interview protocol (Appendix C) explored compliance management, interaction histories with regulators, and sources of beliefs. Interviews (45–60 minutes) were recorded contemporaneously, transcribed, and thematically analyzed to identify recurring patterns and to contextualize survey findings. Confidentiality was promised in line with qualitative research practice. The project was exploratory and hypothesis-generating rather than designed to test specific hypotheses.

- Availability heuristic and salience of paperwork: Reporting and recordkeeping emerged as disproportionately salient burdens. About half of surveyed firms reported spending more than an hour per week on government compliance forms. When asked which regulations had a significant impact (n=288), reported frequencies were: overall volume of regulations 47%, recordkeeping/reporting 43%, employee benefits 42%, environment 32%, worker safety 29%, licensing 25%. Interviews highlighted continual visibility of paperwork versus the relative invisibility of one-time process changes, reinforcing negative perceptions, especially when the purpose of paperwork was unclear or seemingly duplicative. - Bandwagon effects and partisan/social reinforcement: Regulatory attitudes correlated with party identification. Democrats were significantly more likely than Republicans to endorse pro-regulatory paired statements on public interest and number of regulations (p<0.001 and p<0.05, respectively) and international competition (p<0.001). Information sources for learning about new regulations (n=320) showed only 34% relied on government agencies, while many used trade associations (31%), chambers of commerce (17%), and word of mouth (20%), channels likely to frame regulations negatively. Interviews reported reliance on talk radio, the Internet, and like-minded peers, reinforcing anti-regulatory narratives. - Anchoring on salient negative incidents: Interviews revealed strong anchoring to memorable adverse experiences (e.g., a $750 fine for a missing fire extinguisher log entry; a decades-old adverse legal decision), which disproportionately shaped attitudes toward regulators. Stories about perceived unfair enforcement affecting neighbors or competitors also anchored perceptions. - Self-serving bias and mood effects: Perceptions of the state economy correlated with four of five regulatory attitude items (significant at 95%–99% levels; e.g., p=0.001 for public interest, p=0.009 for number of regulations). Negative economic mood appeared to co-occur with more negative views of regulation, consistent with self-serving attribution to external factors. - Limits of disclosure “nudges”: Interview observations suggested low attention to mandated workplace disclosures (e.g., OSHA pictograms and notice walls), with owners questioning their clarity and salience, indicating that poorly designed or overabundant disclosures may be ineffective without careful attention to timing, simplicity, salience, and audience processing. Overall, the evidence indicates that small business owners’ regulatory perceptions are shaped less by objective cost-benefit calculations and more by salient, frequent, or emotionally resonant experiences and socially reinforced narratives.

The findings suggest that small business compliance perceptions are strongly influenced by behavioral heuristics. The availability of recurrent paperwork tasks heightens perceived burden, even when other regulations may impose higher one-time costs. Anchoring on negative encounters with enforcement amplifies distrust and shapes narratives about regulatory unfairness. Bandwagon effects via partisan identification and information ecosystems further entrench anti-regulatory attitudes, while economic mood and self-serving bias make regulation a convenient locus of blame during downturns. These behavioral dynamics help explain why regulatory debates become polarized and why compliance attitudes can diverge from objective risk or cost assessments. Recognizing these mechanisms has implications for policy design and enforcement: improving salience of benefits and purposes of rules, reducing redundant paperwork, tailoring communication channels beyond intermediaries predisposed to negative framing, and training inspectors to avoid actions that create memorable but low-value punitive experiences. Incorporating behavioral insights into evaluation and enforcement could improve compliance outcomes and mitigate antagonism between agencies and small businesses.

The paper contributes an exploratory mapping of behavioral heuristics—availability, bandwagon effects, anchoring, and self-serving bias—onto small business regulatory perceptions, showing how these shape attitudes toward government and potentially compliance behavior. It highlights the outsized role of paperwork salience, socially reinforced narratives, memorable negative incidents, and economic mood in driving anti-regulatory sentiment, and it questions the effectiveness of some disclosure-based nudges absent careful design. Policy implications include: applying behavioral insights to regulatory enforcement (e.g., deemphasizing punitive responses to minor paperwork lapses), expanding compliance assistance and transparent rationales for requirements, focusing retrospective review on cumulative reporting burdens (potentially via a strengthened Paperwork Reduction Act), and fostering “green tape” qualities (clear purpose, appropriate control levels, goal alignment). Future research should test hypotheses on differences across firm size and sectors, examine other regulated communities beyond business, and evaluate how distinct heuristics interact with organizational context to affect compliance and political polarization around regulation.

The study is exploratory and not designed to test specific hypotheses. The survey targeted small manufacturing businesses in seven Midwestern and nearby states during 2017, limiting generalizability to other regions, sectors, and especially to large firms. Qualitative evidence is based on eight interviews, which, while providing depth, represent a small, self-selected subset of respondents. Perceptions and self-reported measures may be influenced by recall and attribution biases. Findings thus generate hypotheses and policy-relevant insights but should be interpreted with caution regarding broader inference.