AbstractThis paper examines the relative costs of workers' compensation insurance across firm‐size groups, with particular focus on administrative scale economies (“compliance effects”) and biases in rate‐setting (“enforcement effects”). Analyzing data on premiums and losses from the insurance industry, the authors find that the costs of insurance per dollar of loss are relatively high for very small firms. These higher costs reflect certain fixed administrative costs insurance companies must bear, but for extremely small firms these higher costs tend to be mitigated by an “enforcement” bias in state rate‐setting outcomes. Due to imperfect experience‐rating of insurance premiums, middle‐sized firms—which have the highest losses—pay less per dollar of loss than either the smallest or largest firms. Indeed, it appears that large firms purchasing commercial workers' compensation insurance su