Working Paper: CEPR ID: DP13224
Authors: Emeric Henry; Marco Loseto; Marco Ottaviani
Abstract: We analyze the optimal mix of ex ante experimentation and ex post learning for the dynamic adoption of activities with uncertain payoffs in a two-phase model of information diffusion. In a first pre-introduction phase, costly experimentation is undertaken to decide whether to adopt an activity or abandon experimentation. In a second stage following adoption, learning can continue possibly at a different pace while the activity remains in place; the withdrawal option is exercised following the accumulation of sufficiently bad news. We compare from a law and economics perspective the performance of three regulatory frameworks commonly adopted to govern private experimentation and adoption incentives: liability, withdrawal, and authorization regulation. Liability should be preempted to avoid chilling of activities that generate large positive externalities, consistent with the preemption doctrine. Liability should be used to discourage excessive experimentation for activities that generate small positive externalities. Authorization regulation should be lenient whenever it is used, consistent with the organization of regulation in a number of areas ranging from product safety to antitrust.
Keywords: authorization regulation; liability; withdrawal; experimentation; preemption doctrine
JEL Codes: D18; D83; K13; K2; M38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liability should be preempted (K13) | Decrease in experimentation incentives (O31) |
| Authorization regulation should be lenient (K23) | Encouragement of innovation (O35) |
| Combination of ex ante and ex post regulations (G18) | Optimize social welfare (D69) |
| Stricter regulations (G18) | Reduced experimentation and adoption rates (L15) |