Thresholds and Exceptions as Regulatory Failures

It is striking the disproportionate number of Spanish companies that have exactly 49 employees, 62% more than the number that would be expected. The primary reason for this anomaly is that these companies try to avoid a part of the rules on labor representation, thus benefiting from the exception that smaller companies enjoy. In general, we must consider that many regulatory exceptions, whereby the legislator excludes an entire segment of the market from the scope of the law (the case, for example, of domestic service with respect to the labor market) or includes only certain agents (larger companies or owners of a certain minimum number of dwellings) are not due to the fact that the application of such rules is more costly or less socially beneficial for those excluded but because the legal exception increases political support for the corresponding rules or reduces possible opposition to them. On the one hand, compliance costs are often contractible and therefore do not offer sufficiently significant economies of scale; while the benefits may even be higher in excluded companies. On the other hand, exceptions do distort the political decision-making process when beneficiaries lose interest in understanding and opposing the regulatory proposal or even gain an advantage if the rules apply only to their competitors. Consequently, rather than seeing the thresholds as a consequence of how the costs and benefits of legal compliance vary with the size or type of firms, we should pay attention to the purely political logic of the exceptions that such thresholds entail. Regulation is intended to correct market failure, but the presence of thresholds and other exceptions could well indicate that it is actually driven by political failure.