Industry Self-Governance and National Security: On the Private Control of Dual Use Technologies

Abstract

High tech industries often use R&D inputs that pose significant risk. We analyze the case where downstream firms manage this risk by using their buyer power to impose industrywide regulations on their suppliers. This “buyers decide" mechanism is fundamentally different from the existing economics literature in which industry‐wide standards are imposed by network effects. We show that where upstream firms face incomplete liability, downstream firms choose inefficiently low regulation and that ‐‐ contrary to the conventional wisdom ‐‐ threats of regulatory backlash make this problem worse. We also find that downstream firms with larger buyer power c.p. prefer stronger regulation. For the case of “dual use" technologies we show that information asymmetries may enable suppliers to propose deliberately low security standards to deter entry. Finally, we analyze the conditions under which downstream firms with large buyer power can impose their preferred regulation as the industry‐wide standard.

Keywords: dual use products, self-governance, self-regulation, private regulation, buyer-power

JEL Classification: L19, L51, K29