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Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties?

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Author Info
Immordino, Giovanni
Pagano, Marco
Polo, Michele

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7280.

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Date of creation: Apr 2009
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Handle: RePEc:cpr:ceprdp:7280

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Related research
Keywords: authorization; deterrence; innovation; liability for harm; safety regulation;

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Find related papers by JEL classification:
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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