hero working papers

Incentives to Innovate and Social Harm:Laissez-Faire, Authorization or Penalties?

Number: 349
Year: 2009
Author(s): Giovanni Immordino, Marco Pagano and Michele Polo
We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching First from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.

Keywords: innovation, liability for harm, safety regulation, authorization
JEL codes: D73, K21, K42, L51