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An Activity-Generating Theory of Regulation

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  • 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.

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 19524.

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Handle: RePEc:qsh:wpaper:19524

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  1. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
  3. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 76, pages 169.
  4. W. Kip Viscusi, 1991. "Product and Occupational Liability," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 71-91, Summer.
  5. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-67, May.
  6. Png, I. P. L., 1986. "Optimal subsidies and damages in the presence of judicial error," International Review of Law and Economics, Elsevier, vol. 6(1), pages 101-105, June.
  7. Nicola Gennaioli & Andrei Shleifer, 2006. "Judicial Fact Discretion," NBER Working Papers 12679, National Bureau of Economic Research, Inc.
  8. Viscusi, W Kip & Moore, Michael J, 1993. "Product Liability, Research and Development, and Innovation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(1), pages 161-84, February.
  9. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1289-1332, November.
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Cited by:
  1. Immordino, Giovanni & Pagano, Marco & Polo, Michele, 2011. "Incentives to innovate and social harm: Laissez-faire, authorization or penalties?," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 864-876, August.
  2. repec:reg:wpaper:5 is not listed on IDEAS
  3. Andrei Shleifer, 2010. "Efficient Regulation," NBER Working Papers 15651, National Bureau of Economic Research, Inc.
    • Andrei Shleifer, 2010. "Efficient Regulation," NBER Chapters, in: Regulation vs. Litigation: Perspectives from Economics and Law, pages 27-43 National Bureau of Economic Research, Inc.
  4. Scott Baker & Claudio Mezzetti, 2012. "A Theory of Rational Jurisprudence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(3), pages 513 - 551.
  5. Giovanni Immordino & Michele Polo, 2013. "Public Policies in Investment Intensive Industries," Working Papers 507, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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