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. 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)

    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. John Morgan & Felix Várdy, 2011. "On the buyability of voting bodies," Journal of Theoretical Politics, , vol. 23(2), pages 260-287, April.
    2. Bennedsen, Morten & Feldmann, Sven E., 2006. "Informational lobbying and political contributions," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 631-656, May.
    3. Charles Sabel & Gary Herrigel & Peer Hull Kristensen, 2018. "Regulation under uncertainty: The coevolution of industry and regulation," Regulation & Governance, John Wiley & Sons, vol. 12(3), pages 371-394, September.
    4. 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.
    5. Awad, Emiel & Minaudier, Clement, 2023. "Persuasive Lobbying and the Value of Connections," SocArXiv 8z4ax, Center for Open Science.
    6. Rantakari, Heikki, 2014. "A simple model of project selection with strategic communication and uncertain motives," Journal of Economic Behavior & Organization, Elsevier, vol. 102(C), pages 14-42.
    7. Ismail Saglam & Mehmet Y. Gurdal & Ayca Ozdogan, 2011. "Truth-telling and Trust in Sender-receiver Games with Intervention," Koç University-TUSIAD Economic Research Forum Working Papers 1123, Koc University-TUSIAD Economic Research Forum.
    8. Daniel Habermacher, 2022. "Information Aggregation in Multidimensional Cheap Talk," Working Papers 169, Red Nacional de Investigadores en Economía (RedNIE).
    9. Thomas Choate & John A Weymark & Alan E Wiseman, 2020. "Legislative bargaining and partisan delegation," Journal of Theoretical Politics, , vol. 32(2), pages 289-311, April.
    10. Boris Knapp, 2021. "Fake Reviews and Naive Consumers," Vienna Economics Papers 2102, University of Vienna, Department of Economics.
    11. Battaglini, Marco & Lai, Ernest K. & Lim, Wooyoung & Wang, Joseph Tao-Yi, 2019. "The Informational Theory of Legislative Committees: An Experimental Analysis," American Political Science Review, Cambridge University Press, vol. 113(1), pages 55-76, February.
    12. Vijay Krishna & John Morgan, 2008. "Contracting for information under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 905-925, December.
    13. Daniel Carpenter, 2014. "Accounting for Financial Innovation and Borrower Confidence in Financial Rule Making: Analogies from Health Policy," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 331-349.
    14. Takashi Shimizu, 2017. "Cheap talk with an exit option: a model of exit and voice," International Journal of Game Theory, Springer;Game Theory Society, vol. 46(4), pages 1071-1088, November.
    15. Christophe Crombez & Simon Hix, 2011. "Treaty reform and the Commission’s appointment and policy-making role in the European Union," European Union Politics, , vol. 12(3), pages 291-314, September.
    16. 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.
    17. Austen-Smith, David & Banks, Jeffrey S., 2000. "Cheap Talk and Burned Money," Journal of Economic Theory, Elsevier, vol. 91(1), pages 1-16, March.
    18. Carrillo, Juan & Brocas, Isabelle, 2005. "A Theory of Influence: The Strategic Value of Public Ignorance," CEPR Discussion Papers 4907, C.E.P.R. Discussion Papers.
    19. Archishman Chakraborty & Parikshit Ghosh & Jaideep Roy, 2020. "Expert-Captured Democracies," American Economic Review, American Economic Association, vol. 110(6), pages 1713-1751, June.
    20. Richard Ball, 1995. "Interest Groups, Influence And Welfare," Economics and Politics, Wiley Blackwell, vol. 7(2), pages 119-146, July.

    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.