This paper develops and tests a theory of compliance costs. Tension between not complying, with a low probability of detection, and complying, incurring quite high time and money costs, should result in varied choices for a sample of small businesses but high costs per dollar of revenue for those that comply. Medium-sized businesses are likely to comply because many costs are invariant with respect to size, and because they are likely to be caught if they do not comply. Empirical tests of this theory for a Washington State small- and medium-sized business sample confirm that small businesses report higher mean costs, but have greater variability across firms, than medium-sized businesses.
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