Learn by Doing or Learn by Failing? The Paradoxical Effect of Public Policy in Averting the Liability of Newness

Public policy regulations, designed to legitimate and protect fragile, fledgling new firms from failure, on the surface, appear to be of great value. According to Stinchcombe, to the extent that such policies serve as “standard social routines,” they may even work to decrease the liability of newness. Using a sample of more than 2,600 new banks chartered in the United States over a 15-year span under the supervision of three different regulatory agencies, we find that failure rates vary according to nuances in the differences in regulations levied by these agencies. Paradoxically, banks that are initially subject to more stringent regulations, intended to limit their strategic choices to a set of “safe and sound” practices, and protect them from failure during their early stages of existence, in fact, have a higher likelihood of failure after those restrictive regulations are lifted. Our results suggest that public policy attempts to thwart the liability of newness are in fact a “fix that fails,” as public policy regulations designed to reduce the liability of newness merely delay the inevitable.