The Effects of Government Licensing on E-commerce: Evidence from Alibaba

Abstract

Inspired by the call in Demsetz’s “Barriers to Entry” for assessing the implications of occupational licensing, we examine how the 2015 Food Safety Law (FSL) affects e-commerce in China. The FSL requires most food sellers on e-commerce platforms to obtain off-line licenses. On the basis of its gradual rollout on Alibaba, we find that larger and more-reputable sellers display an FSL license earlier, and buyers are more willing to transact with a licensed seller, especially if the seller is younger and unestablished. This suggests that the license is informative. Market-wide, the average quality of surviving sellers has improved and seller concentration has increased since the FSL. The platform’s gross merchandise value for food did not decline, nor did the average sales price increase 1 year into full enforcement. This suggests that the FSL does not hamper long-term market performance, probably because it enhances seller quality and market transparency.