IDEAS home Printed from https://ideas.repec.org/p/swe/wpaper/2024-07.html

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. Daron Acemoglu & Todd Lensman, 2024. "Regulating Transformative Technologies," American Economic Review: Insights, American Economic Association, vol. 6(3), pages 359-376, September.
    3. 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.
    4. Lu, Shih En, 2017. "Coordination-free equilibria in cheap talk games," Journal of Economic Theory, Elsevier, vol. 168(C), pages 177-208.
    5. 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.
    6. 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.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    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. Rebecca Slayton & Aaron Clark‐Ginsberg, 2018. "Beyond regulatory capture: Coproducing expertise for critical infrastructure protection," Regulation & Governance, John Wiley & Sons, vol. 12(1), pages 115-130, March.
    3. Justin Rex, 2020. "Anatomy of agency capture: An organizational typology for diagnosing and remedying capture," Regulation & Governance, John Wiley & Sons, vol. 14(2), pages 271-294, April.
    4. Moser, Peter, 1999. "The impact of legislative institutions on public policy: a survey," European Journal of Political Economy, Elsevier, vol. 15(1), pages 1-33, March.
    5. John M. de Figueiredo & Edward H. Stiglitz, 2015. "Democratic Rulemaking," NBER Working Papers 21765, National Bureau of Economic Research, Inc.
    6. Emeric Henry & Marco Loseto & Marco Ottaviani, 2022. "Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability," Management Science, INFORMS, vol. 68(7), pages 5330-5347, July.
    7. David Epstein & Sharyn O'Halloran, 1999. "Asymmetric Information, Delegation, and the Structure of Policy-Making," Journal of Theoretical Politics, , vol. 11(1), pages 37-56, January.
    8. 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.
    9. Aviv Pichhadze, 2016. "Is the SEC a learning regulator? Lessons from proxy access," Regulation & Governance, John Wiley & Sons, vol. 10(4), pages 384-398, December.
    10. 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.
    11. 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.
    12. 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.
    13. Jivas Chakravarthy & Katie E. McDermott & Roger M. White, 2021. "Are Regulators Effective at Unraveling Accounting Manipulation? Evidence from Public Utility Commissions," Management Science, INFORMS, vol. 67(7), pages 4532-4555, July.
    14. Ekaterina Borisova & Timothy Frye & Koen Schoors & Vladimir Zabolotskiy, 2022. "Fear, Trust and Demand for Regulation: Evidence from the Covid-19 Pandemic in Russia," CESifo Working Paper Series 10156, CESifo.
    15. Özgün AKDURAN-EROL, 2024. "Regulation of Natural Monopoly: The Turkish Electricity Market," Sosyoekonomi Journal, Sosyoekonomi Society, issue 32(60).
    16. Gans, Joshua S., 2025. "Regulating the direction of innovation," Journal of Public Economics, Elsevier, vol. 246(C).
    17. 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.
    18. 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.
    19. Francesco Trebbi & Miao Ben Zhang, 2022. "The Cost of Regulatory Compliance in the United States," NBER Working Papers 30691, National Bureau of Economic Research, Inc.
    20. Scott Gehlbach & Konstantin Sonin & Ekaterina Zhuravskaya, 2010. "Businessman Candidates," American Journal of Political Science, John Wiley & Sons, vol. 54(3), pages 718-736, July.

    More about this item

    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.