The Impact of the Americans with Disabilities Act on the Entry and Exit of Retail Firms

Congress enacted The Americans with Disabilities Act of 1990 over the protests of small business advocates who claimed that the ADA would trigger a wave of bankruptcies. Although the profitability of firms may suffer from the costs of ADA compliance, no systematic review of the evidence has been done. This paper seeks to determine if the ADA had a measurable impact on both the entry of new firms and the failure rate (exit) of existing firms. The empirical results are consistent with the hypothesis that the ADA negatively impacted the retail industry. There were fewer retail firms after the ADA was passed, and the drop was larger in states in which the ADA was more of a legal innovation, and in states that had more disabled people, more ADA-related lawsuits, and more ADA-related labor complaints. There is also evidence that employment and access discrimination suits imposed real costs on retail stores, encouraging exit. However, the exit of incumbents was partially offset by new entry. Overall, the number of food stores decreased 2-13% after the ADA came into effect, and at least a 1.4-2.3% decrease in the number of smaller stores may be attributed directly to the ADA, net of trends affecting larger firms. Two subsidiary contributions of the paper are an inquiry into the response of industry dynamics to increases in costs, and an econometric model to back out entry and exit rates from establishment count data. The theoretical model of industry dynamics shows that increases in marginal and fixed costs may have interesting and non-obvious effects on entry and exit. The econometric model enables maximum likelihood estimation of unobserved entry and exit processes based on the observed establishment count data. Both models show promise for application to other questions in economics