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Term: Peter Pan Syndrome

29 Sep 2014


A regulatory environment in which firms prefer to stay small rather than grow. A Peter Pan system is characterized by a significant portion of firms remaining small, even though the firms could be more productive and profitable if they were larger.


The Peter Pan syndrome can be seen in both developed and developing economies. Firms remain small in order to avoid reaching thresholds that, if crossed, could expose them to a different set of regulations. For example, manufacturing firms in France typically employ fewer than fifty employees, and large companies in Portugal face taxes that smaller firms do not. Heavily regulated economies tend to have smaller firms.

The persistence of the Peter Pan syndrome is strongly linked to the idea of the small business. Small businesses are often romanticized, with images of “mom and pop” stores in small towns providing locals with goods and services. The combination of capital and labor, however, is often employed most efficiently in larger companies, and larger companies tend to be more productive. Governments that enact onerous regulations based on the size of firms risk forcing the misallocation of resources in less efficient firms, which can negatively impact productivity and depress economic growth.

Countries looking to develop industries capable of global trade while also maintaining regulations that favor small businesses may find it difficult to get going. Additionally, emphasizing small firms may lead to the growth of informal or illegal firms that don’t contribute taxes. These firms are also less likely to provide health coverage to their workers, may offer less job security, and are less likely to provide retirement benefits.

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