Abstract
This paper studies the welfare implications of size-dependent firm regulation policies (SDPs) in the presence of entrepreneurial risks. Although SDPs have been considered sources of misallocation, it is shown that, once entrepreneurial risks are taken into account, SDPs can improve efficiency. Quantitatively, based on French data, removing the SDP can lead to output and welfare loss by up to 1.3 and 1.1 percent respectively. Importantly, the sign and the policy implications are the opposite of the previous literature that abstracts from risks. The analysis uncovers a novel trade-off between the inefficiencies in the intensive and extensive margins.