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

Marco Pagano, Michele Polo and Giovanni Immordino

No 7280, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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: Authorization; Deterrence; Innovation; Liability for harm; Safety regulation (search for similar items in EconPapers)
JEL-codes: D73 K21 K42 L51 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-ino, nep-ipr, nep-pr~, nep-mic and nep-reg
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Related works:
Journal Article: Incentives to innovate and social harm: Laissez-faire, authorization or penalties? (2011)
Journal Article: Incentives to innovate and social harm: Laissez-faire, authorization or penalties? (2011)
Working Paper: Incentives to Innovate and Social Harm:Laissez-Faire, Authorization or Penalties? (2009)
Working Paper: Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties? (2009)
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