Working Paper: NBER ID: w14752
Authors: Joshua Schwartzstein; Andrei Shleifer
Abstract: We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to innovation are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are, and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.
Keywords: regulation; tort litigation; firm behavior; social welfare; innovation
JEL Codes: D62; K13; K40; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| court errors (K40) | unpredictable litigation (K41) |
| unpredictable litigation (K41) | discouraged firm activity (H32) |
| regulatory compliance (K23) | increased firm activity (D21) |
| regulatory compliance (K23) | safe harbor (Y20) |
| safe harbor (Y20) | increased firm activity (D21) |
| social benefits high (I31) | optimal policy allows negligence claims (K13) |
| social benefits low (J32) | reduces magnitude of damage awards for compliant firms (G18) |