More People, More Problems

Why do some U.S. states have more laws than others?

In the recent study “Population and Regulation,” University of Chicago professor Casey B. Mulligan and Andrei Shleifer of Harvard University examine the relationship between a U.S. state’s (or a country’s) population and its amount of laws.

“We wanted to find out if government has grown on the regulation side of the ledger,” says Mulligan.

To address this issue, Mulligan and Shleifer developed a statistical model to analyze the creation of different types of regulation, establish the relationship between population and regulation, and calculate how responsive population size is to regulation. The model’s focus on population rather than aggregate activity distinguishes it from earlier research.

Mulligan and Shleifer tested their model using data both from U.S. states and foreign countries. Based on cross-state data on the amount of law, as measured by the number of pages in each state’s law books, the authors find that more populous states regulate more activities, and these regulations contain greater detail than those of less populous states. More populous states have more pages of legislation and adopt particular laws earlier in their history.

In the model, setting up and running regulatory institutions has a fixed cost, and therefore jurisdictions with larger populations affected by a given regulation are more likely to have the regulation.

To compare countries, the authors looked at several types of regulation, and found that more populous countries tend to have more regulations than less populous countries. The regulation of entry, regulation of labor, and military drafts are more extensive and/or more common in countries with larger populations.

“Our results are surprising because population was not thought to be very important in determining government activities,” says Mulligan. “We would have expected other variables such as income per capita or the age of the state to be more important.”

Efficient Regulation

Mulligan and Shleifer illustrate the importance of population with the efficiency approach to regulation as their starting point. This approach holds that a society chooses to regulate an activity when doing so is a cheaper alternative to addressing the activity by other means.

The simplest illustration of the efficiency approach is the resolution of disputes, which may be resolved either privately or in court. To efficiently resolve disputes, societies may introduce legislation and regulation which delineate the rights and obligations of various community members. In some instances, regulation can reduce the cost of enforcing good conduct.

For example, the regulation of securities markets is designed to prevent fraud, such as worthless securities being issued to a poorly informed public by dishonest promoters and entrepreneurs. By delineating the exact duties of issuers and underwriters with respect to providing information and the exact burdens of proof investors need to recover damages, securities law can reduce the costs of litigation and increase the level of activity in financial markets.

The authors point out that efficient dispute regulation is only one example of why regulations are developed. In principle, regulations may be cost-saving strategies for dealing with social problems in a wide variety of contexts. As a community grows in size, community members will find themselves dealing with more problems. If the community wants to achieve a uniformity of outcomes, it may develop rules rather than relying on markets or informal arrangements. Formulating and enforcing such rules has a fixed cost in terms of organizing, adopting, and enforcing the rules, but the marginal costs of achieving social objectives are reduced.

“You can think of regulation as setting the rules of the game before the game is played, as opposed to making up the rules as you go along,” says Mulligan. “Smaller states have fewer laws, but that doesn’t mean they have total chaos. It simply means disagreements are handled on a case by case basis.”

The Law Books

One aggregate measure of regulation is the number of pages of law, made famous by President Ronald Reagan in his first State of the Union address when he recalled the reduction during his administration in the number of Federal Register pages. The Federal Register consists of new laws passed by Congress, executive orders, and federal government agency reports. Mulligan and Shleifer measured the number of kilobytes (KBs) of state law in 37 states in 2001, 2002, and 2003. One page of law equals roughly one kilobyte of law. A typical state has tens of thousands of KBs of law, and most states publish their law books on the Internet. The authors then compared the KBs of state law to the state’s population.

Regarding their finding that more populous states adopt regulations before less populous states, Mulligan notes: “Because of the size of their populations, big states have myriad problems that are unlikely to occur in small states. Smaller states tend to adopt laws that have already been tried and tested in bigger states, whereas the big states are pioneers, learning things the hard way.”

A less populous state such as Wyoming will likely learn from the experience of a more populous state such as California. Wyoming may learn directly from the way California applies and enforces its laws, or indirectly as these laws are adopted by a state with a slightly larger population such as Oregon. In studying cross-country differences, the authors looked at the country’s employment laws index, business entry regulation index, death penalty measures, and measures of required military service.

Holding constant legal origin, GDP per capita, democracy, and communism, more populous countries have more business regulations, employment regulations, and are more likely to have the death penalty.

“We looked at characteristics of a country that had particular laws versus those that didn’t,” says Mulligan. “Population turned out to be the ubiquitous characteristic in explaining the differences.”

Business entry procedures and labor regulation showed the most pronounced differences, since incremental regulations in these areas cover more “issues” that might arise in the course of economic activity. The authors suggest that smaller jurisdictions might not think it worthwhile to deal with these issues through regulation, while larger jurisdictions face enough demand to cover fixed costs of setting up regulations.

Of particular interest was regulation regarding military duties. The authors obtained data on the existence of the draft, and the number of draftees for 138 countries for the years 1985, 1990, and 1995. They used measures of the size of a country’s armed forces, democracy, and economic development to predict a country’s reliance on a draft. The authors found that when a country uses a military draft, it is used intensively, especially when a country is small.

Optimal Regulation

Given the importance of population in determining the amount of laws in a state or country, what is the optimal amount of regulation?

Mulligan points out that developing and setting up laws has a cost that is independent of how many people the law applies to. Therefore, it makes sense that in larger states or countries the cost of adopting new laws is lower and more efficient, because these laws are applied to a larger group.

Mulligan and Shleifer’s findings suggest that the choice of an optimal jurisdiction should be at least partly determined by population. In larger jurisdictions, regulation reduces the marginal cost of addressing social problems, so a greater range of problems are addressed efficiently. In addition, more interests are articulated when the jurisdiction is larger.

In regards to current public policy issues, Mulligan uses the question of a military draft as one application of their theory.

“People can rest assured that President Bush will not institute a military draft as long as the current size of the U.S. army is relatively small,” says Mulligan. “When you have a large army, the cost of starting up a draft is not as large when measured per soldier. The draft made more sense during the Vietnam War because the army was larger. If we will not be raising many troops, it makes more sense to use taxes and spending in the labor market for soldiers.”