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Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability

Emeric Henry, Marco Loseto and Marco Ottaviani

No 13224, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Dynamic adoption policies of activities with uncertain returns are characterized by three key decisions: in the ex ante experimentation phase, the decisions when to abandon experimentation and when to introduce to market; in the ex post learning phase, the decision when to withdraw following the accumulation of bad news. In a tractable continuous-time model, we study the optimal mix of the three instruments regulators employ to align the private incentives of firms: ex ante approval regulation, ex post withdrawal regulation, and liability. Our results can rationalize the array of regulatory environments observed across applications ranging from product safety to patent protection. We also consider costly lying and show that the social planner can be better off when the firm privately observes research results.

Keywords: Approval Regulation; Experimentation; Liability; Withdrawal (search for similar items in EconPapers)
JEL-codes: D18 D83 K13 K2 M38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law, nep-mic and nep-reg
Date: 2018-10
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