Does Restricting the Entry of Formula Businesses Help Mom-and-Pop Stores? The Case of American Towns with Unique Community Character

Communities worldwide have been wrestling with issues associated with chain stores proliferation. Many have explored and enacted chain store entry barriers in response, but how such regulations affect mom-and-pop businesses is still largely debated. The impact of chain store entry barriers on independent businesses is likely to vary by the characteristics of the local economy, a consideration overlooked by existing studies. Using a sample of U.S. cities with unique community character, we examine the effect of Formula Business Restrictions (FBR), a type of an American land use regulation that restricts the entry of “formula businesses,” defined as businesses offering and utilizing a standardized set of merchandise, services, and design. We find that the passage of FBR led to higher number and percentage of employees working in mom-and-pop businesses. This positive effect occurred over time with increasing magnitude. We also find that FBR had heterogeneous effects on different industry groups. For example, FBR had strong positive effects on retail mom-and-pop stores, but not on the service sector. Lastly, we show that FBR helped mom-and-pop businesses primarily by protecting existing ones from downsizing. These findings suggest that chain store entry barriers can be beneficial for independent businesses located in small towns with unique community character, but policymakers must be cautious of its varying effects on different industry groups.