The Impact of Minium Quality Standards on Firm Entry, Exit and Product Quality: The Case of Child Care Market

PWP-CCPR-2005-063

Abstract

We examine the impact of minimum quality standards on the supply side of the child care mar- ket, using a unique panel data set merged from the Census of Services Industries, state regulation data, and administrative accreditation records from the National Association of Education for Young Children. We control for state-specific and time-specific fixed effects in order to mitigate the biases associated with policy endogeneity. We find that the effects of quality standards speci- fying the labor intensiveness of child care services are strikingly different from those specifying staff qualifications. Higher staff-child ratio requirements deter entry and reduce the number of operating child care establishments. This entry barrier appears to select establishments with bet- ter quality into the market and alleviates competition among existing establishments: existing es- tablishments are more likely to receive accreditation and higher profits, and are less likely to  exit. By contrast, higher staff-education requirements do not have entry-deterrence effects. They do have the unintended effects of discouraging accreditation, reducing owners’ profits, and driv- ing firms out of businesses.