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

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

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Cited by:
  1. Giovanni Immordino & Michele Polo, 2011. "Optimal Legal Standards in Antitrust: Traditional v. Innovative Industries," Working Papers 420, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Luca Anderlini & Leonardo Felli & Giovanni Immordino & Alessandro Riboni, 2013. "Legal Institutions, Innovation, And Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 937-956, 08.
  3. Magda Bianco & Giulio Napolitano, 2011. "The Italian Administrative System: Why a Source of Competitive Disadvantage?," Quaderni di storia economica (Economic History Working Papers) 24, Bank of Italy, Economic Research and International Relations Area.
  4. Giovanni Immordino & Michele Polo, 2012. "Antitrust in Innovative Industries: the Optimal Legal Standards," Working Papers 434, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  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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