Hall and Young, 1991; Hall, 1992; Gaskill et al., 1993). In addition, Osborne (1993) argues that
poor planning, poor money management, a lack of expertise and credibility, and failure to follow
government regulations contribute to entrepreneurial failure.
Entrepreneurs and small businesses are vital to the economy through their innovation,
job production, and collective stimulation of the economy (Audretsch and Thurik, 2001;
Birch, 1987; Kumar and Liu, 2005; Schumpeter, 1976). Since the 1970s, 55 percent of all US
jobs have been provided by small businesses (Small Business Administration, 2016).
Despite their vital role in the economy, new and small businesses face an average failure rate
of over 43 percent in their first five years (Bureau of Labor Statistics, 2016a, b).
Although there are many factors that contribute to small business failure, government
agencies and regulatory compliance are a contributing factor (Clute and Garman, 1980;
Edmunds, 1979; Lewis et al., 2014; Nicoletti et al., 2003; O’Neill and Duker, 1986).
Lewis et al. (2015) categorizes regulatory compliance costs for small businesses into three
categories. First, entrepreneurs bear the cost of acquiring knowledge concerning which
regulations apply to their business. This could include hiring experts (i.e. lawye rs and
accountants) to train and educate both the entrepreneur and employees as well as time spent
seeking licenses, permits, and understanding regulation. Second, they must cover the actual
costs of complying with regulations such as health and safety requirements. Third, small
businesses must demonstrate to regulators that they are compliant through record keeping and
paperwork. Compliance in these areas can prove substantially difficult for small businesses with
limited capital due to the financial strain of employee salaries, time delays, and operating costs.
Studies on the effects of differing levels of regulation across countries shows that higher
levels of regulation lead to lower levels of entrepreneurship and small business creation
(Ardagna and Lusardi, 2008; Klapper et al., 2006; Niskanen, 1968). In a comparison of
countries’regulatory regimes, Djankov et al. (2002) finds that higher levels of regulation do
not lead to higher quality products or better health outcomes. Danjkov et al. do find,
however, that more regulation over marketplace entry is associated with higher levels of
corruption (Aidis et al., 2012; Alt and Lassen, 2003). Higher levels of corruption can lead to
greater difficulty for small businesses. Following public choice theory, large corporations
and interest groups with substantial capital are able to capture lawmakers and bureaucrats
(Stigler, 1971; Peltzman, 1976), which adversely decreases the ability of small businesses to
influence regulation because they have less to offer. Regulatory capture allows incumbent
businesses to influence regulation that creates barriers to entry for new businesses. Dennis
(2004) and van Stel et al. (2007) show that lowering barriers to entry will assist small
business and decrease their failure rate.
Countless numbers of emerging small businesses fail, but these numerous cases rarely
garner enough attention to trace the actual effects of government regulation on small and
new firms. Understanding the effects of regulation on small and emerging businesses is
necessary to improve the small business failure rate (Abdelsamad and Kindling, 1978).
This paper examines one of the numerous cases of a small business that closed due to
government regulation. Unlike similar situations, however, this case garnered enough
controversy and media attention to trace the actual effects of regulation. This paper begins
with an evaluation of the history of food safety regulation using a public choice framework
and contains a case study that traces the effects of California’s dairy regulation on The
White Moustache (TWM), a small yogurt company.
2.1 Regulation in the food industry
Around the turn of the twentieth century, assembly line production changed and expanded
the ability to produce in the modern world. Workers became much more productive in the
food industry as they specialized in a small number of tasks, which increased efficiency, and