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Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability

Author

Listed:
  • Henry, Emeric
  • Loseto, Marco
  • Ottaviani, Marco

Abstract

Dynamic adoption policies of activities with uncertain returns are characterized by three key decisions: in the ex ante experimentation phase, the decisions when to abandon experimentation and when to introduce to market; in the ex post learning phase, the decision when to withdraw following the accumulation of bad news. In a tractable continuous-time model, we study the optimal mix of the three instruments regulators employ to align the private incentives of firms: ex ante approval regulation, ex post withdrawal regulation, and liability. Our results can rationalize the array of regulatory environments observed across applications ranging from product safety to patent protection. We also consider costly lying and show that the social planner can be better off when the firm privately observes research results.

Suggested Citation

  • Henry, Emeric & Loseto, Marco & Ottaviani, Marco, 2018. "Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability," CEPR Discussion Papers 13224, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13224
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Approval Regulation; Experimentation; Liability; Withdrawal;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K2 - Law and Economics - - Regulation and Business Law
    • M38 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Government Policy and Regulation

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