IDEAS home Printed from https://ideas.repec.org/p/swe/wpaper/2024-07.html
   My bibliography  Save this paper

Regulating an Innovative Industry

Author

Listed:
  • Steven Callander

    (Stanford University, Stanford Graduate School of Business)

  • Hongyi Li

    (University of New South Wales, School of Economics)

Abstract

Innovations bring many benefits to society, but they can also bring harm. We study the problem of a regulator deciding whether to approve an innovation where information about the impact of the innovation is held within the firms that are developing it. We show that competition for the innovation undermines the regulator’s ability to extract the information she needs to make good policy. As the number of firms increases and the expected benefit of the innovation grows, the probability that the regulator is persuaded to approve an innovation decreases. This tension between competition and communication reverses Arrow’s famous “replacement effect.” Thus, in regulated markets, more competition can lead to fewer innovations making it to market. We explore how this tension can be mitigated, but not eliminated, by political and market design.

Suggested Citation

  • Steven Callander & Hongyi Li, 2024. "Regulating an Innovative Industry," Discussion Papers 2024-07, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2024-07
    as

    Download full text from publisher

    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2024-07.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    2. Carpenter, Daniel P., 2004. "Protection without Capture: Product Approval by a Politically Responsive, Learning Regulator," American Political Science Review, Cambridge University Press, vol. 98(4), pages 613-631, November.
    3. Steven Callander & Dana Foarta & Takuo Sugaya, 2022. "Market Competition and Political Influence: An Integrated Approach," Econometrica, Econometric Society, vol. 90(6), pages 2723-2753, November.
    4. Gilligan, Thomas W & Krehbiel, Keith, 1987. "Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(2), pages 287-335, Fall.
    5. Daron Acemoglu & Todd Lensman, 2024. "Regulating Transformative Technologies," American Economic Review: Insights, American Economic Association, vol. 6(3), pages 359-376, September.
    6. Joshua S Gans, 2025. "How learning about harms impacts the optimal rate of artificial intelligence adoption," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 40(121), pages 199-219.
    7. Lu, Shih En, 2017. "Coordination-free equilibria in cheap talk games," Journal of Economic Theory, Elsevier, vol. 168(C), pages 177-208.
    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. Shapiro, Jesse M., 2016. "Special interests and the media: Theory and an application to climate change," Journal of Public Economics, Elsevier, vol. 144(C), pages 91-108.
    2. Steven Callander & Keith Krehbiel, 2014. "Gridlock and Delegation in a Changing World," American Journal of Political Science, John Wiley & Sons, vol. 58(4), pages 819-834, October.
    3. Rebecca L. Perlman, 2020. "For Safety or Profit? How Science Serves the Strategic Interests of Private Actors," American Journal of Political Science, John Wiley & Sons, vol. 64(2), pages 293-308, April.
    4. Hoekman, Jarno & Boon, Wouter, 2019. "Changing standards for drug approval: A longitudinal analysis of conditional marketing authorisation in the European Union," Social Science & Medicine, Elsevier, vol. 222(C), pages 76-83.
    5. Steven Callander, 2025. "Regulating AI: The Race Between Policymakers and the Rise of a New Interest Group," NBER Chapters, in: The Political Economy of Artificial Intelligence, National Bureau of Economic Research, Inc.
    6. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659, Elsevier.
    7. Rodrigo M. S. Moita & Claudio Paiva, 2013. "Political Price Cycles in Regulated Industries: Theory and Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 94-121, February.
    8. Scott Gehlbach & Konstantin Sonin & Ekaterina Zhuravskaya, 2010. "Businessman Candidates," American Journal of Political Science, John Wiley & Sons, vol. 54(3), pages 718-736, July.
    9. Francesco Caselli & Nicola Gennaioli, 2008. "Economics and Politics of Alternative Institutional Reforms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1197-1250.
    10. Hahn Robert, 2010. "Designing Smarter Regulation with Improved Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, De Gruyter, vol. 1(1), pages 1-19, July.
    11. Bommer, Rolf, 1995. "Environmental policy and industrial competitiveness: The pollution haven hypothesis reconsidered," Discussion Papers, Series II 262, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    12. Thomas Wyrick & Roger Arnold, 1989. "Earmarking as a deterrent to rent-seeking," Public Choice, Springer, vol. 60(3), pages 283-291, March.
    13. Pavel Ciaian & Ján Pokrivčák & Dušan Drabik, 2008. "Prečo sú niektoré sektory v tranzitívnych ekonomikách menej reformované ako ostatné? prípad výskumu a vzdelávania v oblasti ekonómie [Why some sectors of transition economies are less reformed than," Politická ekonomie, Prague University of Economics and Business, vol. 2008(6), pages 819-836.
    14. Kris James Mitchener & Matthew Jaremski, 2014. "The Evolution of Bank Supervision: Evidence from U.S. States," NBER Working Papers 20603, National Bureau of Economic Research, Inc.
    15. Masciandaro, D. & Nieto, M. & Prast, H.M., 2007. "Financial Governance of Banking Supervision," Other publications TiSEM 65d7ff26-dca3-4da3-86ff-6, Tilburg University, School of Economics and Management.
    16. John Morgan & Felix Várdy, 2011. "On the buyability of voting bodies," Journal of Theoretical Politics, , vol. 23(2), pages 260-287, April.
    17. Matthias Dahm & Nicolás Porteiro, 2008. "Informational lobbying under the shadow of political pressure," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(4), pages 531-559, May.
    18. J. Mark Ramseyer & Eric Rasmusen, 2013. "Lowering the Bar to Raise the Bar: Licensing Difficulty and Attorney Quality in Japan," Working Papers 2013-12, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    19. Ronelle Burger & Canh Thien Dang & Trudy Owens, 2017. "Better performing NGOs do report more accurately: Evidence from investigating Ugandan NGO financial accounts," Discussion Papers 2017-10, University of Nottingham, CREDIT.
    20. Grant H. Lewis, 2017. "Effects of federal socioeconomic contracting preferences," Small Business Economics, Springer, vol. 49(4), pages 763-783, December.

    More about this item

    Keywords

    Innovation; regulation; competition;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    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:swe:wpaper:2024-07. 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: Hongyi Li (email available below). General contact details of provider: https://edirc.repec.org/data/senswau.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.