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

29 Pages Posted: 15 Jul 2009

See all articles by Giovanni Immordino

Giovanni Immordino

University of Salerno - Centre for Studies in Economics and Finance (CSEF)

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Michele Polo

Bocconi University - Department of Economics

Date Written: April 2009

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

JEL Classification: D73, K21, K42, L51

Suggested Citation

Immordino, Giovanni and Pagano, Marco and Polo, Michele, Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties? (April 2009). CEPR Discussion Paper No. DP7280. Available at SSRN: https://ssrn.com/abstract=1433857

Giovanni Immordino

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Michele Polo

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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