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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

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2024-07.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    4. Daron Acemoglu & Todd Lensman, 2024. "Regulating Transformative Technologies," American Economic Review: Insights, American Economic Association, vol. 6(3), pages 359-376, September.
    5. Joshua S. Gans, 2024. "How Learning About Harms Impacts the Optimal Rate of Artificial Intelligence Adoption," NBER Working Papers 32105, National Bureau of Economic Research, Inc.
    6. 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)

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    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

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