Dynamic Risk Externalities, Institutional Inertia, and the Limits of Viability

Ingrid Ott and Susanne Soretz

No 13024, CESifo Working Paper Series from CESifo

Abstract: Rapid technological change can generate risks that extend beyond the actors creating them, while institutional capacity to contain these risks adjusts only gradually. Strategic rivalry can reinforce this mismatch by sustaining incentives for technological acceleration even as risk increases. The interaction of endogenous risk creation with institutional inertia can therefore transform a quantitative imbalance between risk creation and governance-capacity formation into a qualitative viability problem: beyond a critical boundary, a low-risk equilibrium ceases to exist. We develop a differential game in which countries choose technological acceleration and governance mobilization. These flows accumulate into technological capability, a common risk stock, and effective governance capacity. Technological capability has productive and strategic value, whereas aggregate acceleration generates risk that is only partially internalized. Rising risk strengthens incentives for containment but can simultaneously increase the strategic value of relative technological capability. Governance mobilization responds to risk but becomes effective only as it is gradually converted into governance capacity. Relative to a multilateral cooperative benchmark, the non-cooperative equilibrium features excessive technological acceleration and insufficient governance mobilization. We map these equilibrium responses into a two-dimensional risk--governance system, which yields an endogenous viability frontier. "Low-risk'' denotes an equilibrium in which accumulated governance capacity is sufficient to balance endogenous risk creation; it does not imply intrinsically low or socially optimal risk. Institutional delay can therefore shift the policy problem from correcting an externality toward preserving a dynamically sustainable balance between risk creation and governance capacity. We apply the framework to current AI policy configurations and AI-enabled synthetic biology. Rapid and increasingly distributed technological capability raises informational, monitoring, and coordination requirements for effective safeguards and can narrow the margin within which risk creation remains dynamically containable.

Keywords: dynamic risk externalities; institutional inertia; nonlinear dynamics; viability frontier; strategic technological competition; artificial intelligence (search for similar items in EconPapers)
JEL-codes: C73 D62 H41 O33 (search for similar items in EconPapers)
Date: 2026
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