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

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Author Info
Giovanni Immordino () (Università di Salerno and CSEF)
Marco Pagano () (Università di Napoli Federico II, CSEF, EIEF and CEPR)
Michele Polo () (Università Bocconi di Milano, IGIER and CSEF)

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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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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 220.

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Date of creation: 25 Mar 2009
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Handle: RePEc:sef:csefwp:220

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

Other versions of this item:

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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    Other versions:
  3. Shavell, Steven, 2007. "Do excessive legal standards discourage desirable activity?," Economics Letters, Elsevier, vol. 95(3), pages 394-397, June. [Downloadable!] (restricted)
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  12. Giovanni Immordino & Michele Polo, 2008. "Judicial Errors and Innovative Activity," CSEF Working Papers 196, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 18 Jul 2008. [Downloadable!]
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  13. Kaplow, Louis, 1995. "A Model of the Optimal Complexity of Legal Rules," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(1), pages 150-63, April.
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