IDEAS home Printed from https://ideas.repec.org/p/lan/wpaper/423283411.html
   My bibliography  Save this paper

The Precautionary Principle and the Innovation Principle

Author

Listed:
  • Kim Kaivanto

Abstract

In policy debates concerning the governance and regulation of Artificial Intelligence (AI), both the Precautionary Principle (PP) and the Innovation Principle (IP) are advocated by their respective interest groups. Do these principles offer wholly incompatible and contradictory guidance? Does one necessarily negate the other? I argue here that provided attention is restricted to weak-form PP and IP, the answer to both of these questions is “No.†The essence of these weak formulations is the requirement to fully account for type-I error costs arising from erroneously preventing the innovation’s diffusion through society (i.e. mistaken regulatory redlighting) as well as the type-II error costs arising from erroneously allowing the innovation to diffuse through society (i.e. mistaken regulatory green-lighting). Within the Signal Detection Theory (SDT) model developed here, weak-PP red-light (weak-IP green-light) determinations are optimal for sufficiently small (large) ratios of expected type-I to type-II error costs. For intermediate expected cost ratios, an amber-light ‘wait-and-monitor’ policy is optimal. Regulatory sandbox instruments allow AI testing and experimentation to take place within a structured environment of limited duration and societal scale, whereby the expected cost ratio falls within the ‘wait-and-monitor’ range. Through sandboxing regulators and innovating firms learn more about the expected cost ratio, and what respective adaptations — of regulation, of technical solution, of business model, or combination thereof, if any — are needed to keep the ratio out of the weak-PP red-light zone.

Suggested Citation

  • Kim Kaivanto, 2025. "The Precautionary Principle and the Innovation Principle," Working Papers 423283411, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:423283411
    as

    Download full text from publisher

    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2025_003.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kim Kaivanto, 2014. "The Effect of Decentralized Behavioral Decision Making on System‐Level Risk," Risk Analysis, John Wiley & Sons, vol. 34(12), pages 2121-2142, December.
    2. Martin Peterson, 2006. "The Precautionary Principle Is Incoherent," Risk Analysis, John Wiley & Sons, vol. 26(3), pages 595-601, June.
    3. Marcello Basili, 2006. "A Rational Decision Rule with Extreme Events," Risk Analysis, John Wiley & Sons, vol. 26(6), pages 1721-1728, December.
    4. Gollier, Christian & Treich, Nicolas, 2003. "Decision-Making under Scientific Uncertainty: The Economics of the Precautionary Principle," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 77-103, August.
    5. Garber, Alan M. & Phelps, Charles E., 1997. "Economic foundations of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 1-31, February.
    6. Viscusi, W. Kip, 1998. "Rational Risk Policy: The 1996 Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198293637, Decembrie.
    7. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(2), pages 312-319.
    8. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
    9. Claude HENRY & Marc HENRY, 2002. "Formalization and Applications of the Precuationary Principle," LIDAM Discussion Papers IRES 2002009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Oliver Todt & José Luis Luján, 2014. "Analyzing Precautionary Regulation: Do Precaution, Science, and Innovation Go Together?," Risk Analysis, John Wiley & Sons, vol. 34(12), pages 2163-2173, December.
    11. Ragnar E. Löfstedt & Baruch Fischhoff & Ilya R. Fischhoff, 2002. "Precautionary principles: general definitions and specific applications to genetically modified organisms," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 21(3), pages 381-407.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kim Kaivanto, 2025. "The Precautionary Principle and the Innovation Principle: Incompatible Guides for AI Innovation Governance?," Papers 2505.02846, arXiv.org.
    2. Randall, Alan, 2009. "We Already Have Risk Management - Do We Really Need the Precautionary Principle?," International Review of Environmental and Resource Economics, now publishers, vol. 3(1), pages 39-74, August.
    3. Turvey, Calum G. & Mojduszka, Eliza M., 2005. "The Precautionary Principle and the law of unintended consequences," Food Policy, Elsevier, vol. 30(2), pages 145-161, April.
    4. Pauline Barrieu & Bernard Sinclair-Desgagné, 2006. "On Precautionary Policies," Management Science, INFORMS, vol. 52(8), pages 1145-1154, August.
    5. Meglena Jeleva & Stéphane Rossignol, 2019. "Optimists, Pessimists, and the Precautionary Principle," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 367-396, September.
    6. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
    7. Caroline Orset, 2014. "Innovation and the precautionary principle," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 23(8), pages 780-801, November.
    8. Kimberly Burnett & James Roumasset & Yacov Tsur, 2007. "Delaying the Catastrophic Arrival of the Brown Tree Snake to Hawaii," Working Papers 200715, University of Hawaii at Manoa, Department of Economics.
    9. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2019. "Staying the Course or Rolling the Dice: Time Horizon’s Effect on the Propensity to Take Risk," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 42(1), pages 66-85.
    10. Krutilla,Kerry Mace & Good,David Henning & Toman,Michael A. & Arin,Tijen, 2020. "Implementing Precaution in Benefit-Cost Analysis : The Case of Deep Seabed Mining," Policy Research Working Paper Series 9307, The World Bank.
    11. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," IDEI Working Papers 805, Institut d'Économie Industrielle (IDEI), Toulouse.
    12. Barbier , Edward B., 2020. "From Limits to Growth to Planetary Boundaries: The Evolution of Economic Views on Natural Resource Scarcity," 2020 Conference (64th), February 12-14, 2020, Perth, Western Australia 305259, Australian Agricultural and Resource Economics Society.
    13. John Quiggin, 2005. "The precautionary principle in environmental policy and the theory of choice under uncertainty," Murray-Darling Program Working Papers WPM05_3, Risk and Sustainable Management Group, University of Queensland.
    14. Jacob LaRiviere & David Kling & James N Sanchirico & Charles Sims & Michael Springborn, 2018. "The Treatment of Uncertainty and Learning in the Economics of Natural Resource and Environmental Management," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 92-112.
    15. Edward B. Barbier & Joanne C. Burgess, 2019. "Scarcity and Safe Operating Spaces: The Example of Natural Forests," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 1077-1099, November.
    16. Michael Finus & Pedro Pintassilgo & Alistair Ulph, 2014. "International Environmental Agreements with Uncertainty, Learning and Risk Aversion," Department of Economics Working Papers 19/14, University of Bath, Department of Economics.
    17. Edouard Civel & Marc Baudry, 2018. "The Fate of Inventions. What can we learn from Bayesian learning in strategic options model of adoption ?," EconomiX Working Papers 2018-47, University of Paris Nanterre, EconomiX.
    18. Guillouet, Louise & Martimort, David, 2023. "Acting in the Darkness: Towards some Foundations for the Precautionary Principle," TSE Working Papers 23-1411, Toulouse School of Economics (TSE), revised Jul 2024.
    19. Millner, Antony & Ollivier, Hélène & Simon, Leo, 2014. "Policy experimentation, political competition, and heterogeneous beliefs," Journal of Public Economics, Elsevier, vol. 120(C), pages 84-96.
    20. Nicolas Treich, 2000. "Décision séquentielle et Principe de Précaution," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 55, pages 5-24.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lan:wpaper:423283411. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Giorgio Motta (email available below). General contact details of provider: https://edirc.repec.org/data/delanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.