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Incentives to innovate and social harm: Laissez-faire, authorization or penalties?

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  • Immordino, Giovanni
  • Pagano, Marco
  • Polo, Michele

Abstract

When firms' research can lead to potentially harmful innovations, public intervention may thwart their incentives to undertake research by reducing its expected profitability (average deterrence) and may guide the use of innovation (marginal deterrence). We compare four policy regimes: laissez faire, ex-post penalties and two forms of authorization - lenient and strict. If fines are unbounded, laissez faire is optimal if the social harm from innovation is sufficiently unlikely; otherwise, regulation should impose increasing penalties as innovation becomes more dangerous. If fines are bounded by limited liability, for intermediate levels of expected social harm it is optimal to adopt (indifferently) penalties or lenient authorization, while strict authorization becomes optimal if social harm is sufficiently likely.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:pubeco:v:95:y:2011:i:7-8:p:864-876
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    Cited by:

    1. 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(3), pages 937-956, August.
    2. Julien Jacob, 2015. "Innovation in Risky Industries under Liability Law: The Case of Double-Impact Innovations," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(3), pages 385-404, September.
    3. 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.
    4. Julien Jacob & Caroline Orset, 2020. "Innovation, information, lobby and tort law under uncertainty," Working Papers of BETA 2020-25, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Joshua Schwartzstein & Andrei Shleifer, 2013. "An Activity-Generating Theory of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 56(1), pages 1-38.
    6. repec:dau:papers:123456789/7722 is not listed on IDEAS
    7. De Chiara, Alessandro & Manna, Ester, 2022. "Corruption and the case for safe-harbor regulation," Economics Letters, Elsevier, vol. 216(C).
    8. Giovanni Immordino & Michele Polo, 2014. "Public Policies in Investment-Intensive Industries," World Scientific Book Chapters, in: Martin Peitz & Yossi Spiegel (ed.), THE ANALYSIS OF COMPETITION POLICY AND SECTORAL REGULATION, chapter 13, pages 365-388, World Scientific Publishing Co. Pte. Ltd..
    9. Julien Jacob & Marc-Hubert Depret & Cornel Oros, 2025. "Innovating safely: how public policies can prevent regrettable substitutions," European Journal of Law and Economics, Springer, vol. 59(3), pages 523-553, June.
    10. Immordino, Giovanni & Polo, Michele, 2014. "Antitrust, legal standards and investment," International Review of Law and Economics, Elsevier, vol. 40(C), pages 36-50.
    11. John Romley & Tiffany Shih, 2017. "Product safety spillovers and market viability for biologic drugs," International Journal of Health Economics and Management, Springer, vol. 17(2), pages 135-158, June.
    12. Mungan, Murat C. & Wright, Joshua, 2022. "Optimal standards of proof in antitrust," International Review of Law and Economics, Elsevier, vol. 71(C).
    13. Friehe, Tim & Schulte, Elisabeth, 2017. "Uncertain product risk, information acquisition, and product liability," Economics Letters, Elsevier, vol. 159(C), pages 92-95.
    14. Julien Jacob & Caroline Orset, 2022. "Coping with Private Lobbies in Industrial and Product Safety Regulation: A Literature Survey," International Review of Environmental and Resource Economics, now publishers, vol. 16(2), pages 171-227, November.
    15. Ilke Onur & Magnus Söderberg, 2020. "The impact of regulatory review time on incremental and radical innovation: evidence from the high-risk medical device market," Journal of Regulatory Economics, Springer, vol. 57(2), pages 134-158, April.
    16. 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.
    17. Cristian Barra & Nazzareno Ruggiero, 2023. "Quality of Government and Types of Innovation—Empirical Evidence for Italian Manufacturing Firms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1749-1789, June.
    18. De Chiara, Alessandro & Elizalde, Idoia & Manna, Ester & Segura-Moreiras, Adrian, 2021. "Car accidents in the age of robots," International Review of Law and Economics, Elsevier, vol. 68(C).
    19. 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.
    20. De Chiara, Alessandro & Manna, Ester, 2022. "Corruption, regulation, and investment incentives," European Economic Review, Elsevier, vol. 142(C).

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    Keywords

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    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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