Innovation and The Precautionary Principle

Recent environmental policies favour the polluter pays principle. This principle points out the pollutant financial liability for the eventual incidents induced by his activities. In this context, we analyse the decision of an agent to invest in new industrial activities, the consequences of which on human health and the environment are initially unknown. It is not possible for him to delay investing, but the agent has the opportunity to acquire information and to reduce the cost of an accident. This allows the agent to reduce uncertainty regarding dangers associated with the project and to limit potential damages that it might cause. However, the agent's chosen level of these actions may be considered as insufficient and not acceptable by Society as response in the face of a possible danger. Precautionary state regulation may then be introduced. We get that this regulation may slow down innovation and may favour innovation in countries with less safety requirements. We find that agent may get around the goal of the regulation by ignoring the information on the dangerousness of its project. We then propose some policy tools which stimulate innovation and impose a certain level of risk considered as acceptable for Society to the agent. Finally, we use a numerical analysis based on the Monsanto Company for studying the agent's behaviour with different regulatory frameworks.