Working Paper: CEPR ID: DP7280
Authors: Giovanni Immordino; Marco Pagano; Michele Polo
Abstract: We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching first from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.
Keywords: authorization; deterrence; innovation; liability for harm; safety regulation
JEL Codes: D73; K21; K42; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory regime (K23) | level of innovation (O35) |
| regulatory regime (K23) | occurrence of social harm (Z13) |
| probability of social harm (C46) | regulatory regime (K23) |
| regulatory regime (K23) | firms' decisions to invest in R&D (O31) |
| regulatory regime (K23) | expected profitability of innovation (O36) |