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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. 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.
  2. Nicola Gennaioli & Andrei Shleifer, 2006. "Judicial Fact Discretion," NBER Working Papers, National Bureau of Economic Research, Inc 12679, National Bureau of Economic Research, Inc.
  3. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, American Economic Association, vol. 70(2), pages 363-67, May.
  4. W. Kip Viscusi, 1991. "Product and Occupational Liability," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(3), pages 71-91, Summer.
  5. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, National Bureau of Economic Research, Inc, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  7. Banerjee, Abhijit V, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1289-1332, November.
  8. 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, American Economic Association, vol. 80(4), pages 888-901, September.
  9. Png, I. P. L., 1986. "Optimal subsidies and damages in the presence of judicial error," International Review of Law and Economics, Elsevier, Elsevier, vol. 6(1), pages 101-105, June.
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Cited by:
  1. Scott Baker and Claudio Mezzetti, 2012. "A Theory of Rational Jurisprudence," Department of Economics - Working Papers Series, The University of Melbourne 1144, The University of Melbourne.
  2. Andrei Shleifer, 2010. "Efficient Regulation," NBER Working Papers, National Bureau of Economic Research, Inc 15651, National Bureau of Economic Research, Inc.
  3. repec:reg:wpaper:5 is not listed on IDEAS
  4. Giovanni Immordino & Michele Polo, 2013. "Public Policies in Investment Intensive Industries," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 507, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. Immordino, Giovanni & Pagano, Marco & Polo, Michele, 2011. "Incentives to innovate and social harm: Laissez-faire, authorization or penalties?," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7), pages 864-876.

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