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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), pages 864-876.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:7:p:864-876
    DOI: 10.1016/j.jpubeco.2011.01.011
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    Citations

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    Cited by:

    1. 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.
    2. Immordino, Giovanni & Polo, Michele, 2014. "Antitrust, legal standards and investment," International Review of Law and Economics, Elsevier, vol. 40(C), pages 36-50.
    3. repec:kap:ijhcfe:v:17:y:2017:i:2:d:10.1007_s10754-016-9208-2 is not listed on IDEAS
    4. 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, August.
    5. repec:eee:ecolet:v:159:y:2017:i:c:p:92-95 is not listed on IDEAS
    6. 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.
    7. 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.
    8. 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.
    9. Giovanni Immordino & Michele Polo, 2014. "Public Policies in Investment-Intensive Industries," World Scientific Book Chapters,in: THE ANALYSIS OF COMPETITION POLICY AND SECTORAL REGULATION, chapter 13, pages 365-388 World Scientific Publishing Co. Pte. Ltd..
    10. repec:dau:papers:123456789/7722 is not listed on IDEAS
    11. Friehe, Tim & Schulte, Elisabeth, 2017. "Uncertain product risk, information acquisition, and product liability," Economics Letters, Elsevier, vol. 159(C), pages 92-95.
    12. 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.

    More about this item

    Keywords

    Innovation; Liability for harm; Safety regulation; Authorization;

    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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