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Regulating the direction of innovation

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  • Gans, Joshua S.

Abstract

This paper examines the regulation of technological innovation direction under uncertainty about potential harms. We develop a model with two competing technological paths and analyse various regulatory interventions. The optimal regulatory approach depends critically on the magnitude of potential harm relative to technological benefits. Our analysis reveals a motive to double down on harmful technologies in resource allocation across research paths, challenging common intuitions about diversification. We demonstrate that ex post regulatory instruments, particularly liability regimes, outperform ex ante restrictions in many scenarios. These insights have important implications for regulating emerging technologies like artificial intelligence, suggesting the need for informationally-responsive regulatory frameworks.

Suggested Citation

  • Gans, Joshua S., 2025. "Regulating the direction of innovation," Journal of Public Economics, Elsevier, vol. 246(C).
    • Handle: RePEc:eee:pubeco:v:246:y:2025:i:c:s0047272725000738
    DOI: 10.1016/j.jpubeco.2025.105375
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    1. Daron Acemoglu, 2011. "Diversity and Technological Progress," NBER Chapters, in: The Rate and Direction of Inventive Activity Revisited, pages 319-356, National Bureau of Economic Research, Inc.
    2. Guerreiro, João & Rebelo, Sérgio & Teles, Pedro, 2023. "Regulating Artificial Intelligence," CEPR Discussion Papers 18625, C.E.P.R. Discussion Papers.
    3. Daron Acemoglu, 2023. "Distorted Innovation: Does the Market Get the Direction of Technology Right?," AEA Papers and Proceedings, American Economic Association, vol. 113, pages 1-28, May.
    4. Bryan, Kevin A. & Lemus, Jorge, 2017. "The direction of innovation," Journal of Economic Theory, Elsevier, vol. 172(C), pages 247-272.
    5. Cowan, Robin, 1990. "Nuclear Power Reactors: A Study in Technological Lock-in," The Journal of Economic History, Cambridge University Press, vol. 50(3), pages 541-567, September.
    6. Daron Acemoglu & Todd Lensman, 2024. "Regulating Transformative Technologies," American Economic Review: Insights, American Economic Association, vol. 6(3), pages 359-376, September.
    7. Joshua S Gans, 2025. "How learning about harms impacts the optimal rate of artificial intelligence adoption," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 40(121), pages 199-219.
    8. Hugo Hopenhayn & Francesco Squintani, 2021. "On the Direction of Innovation," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 1991-2022.
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    10. Ted O'Donoghue & Suzanne Scotchmer & Jacques‐François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, March.
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    Keywords

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    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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