The Effect of Regulation on Innovation
6 Pages Posted: 25 Jun 2013
Date Written: May 21, 2013
Clear rules of the game (e.g., established property rights and institutions of exchange) are important for innovation and entrepreneurship to flourish, but how those rules are defined is important. The scope and reach of federal regulation in the United States has been increasing over the last 30 years, and while federal agencies often try to quantify the benefits and costs of their regulations before they are issued, those measures are necessarily static, and bounded by data available to, and assumptions made by, the analyst. These analyses cannot capture the organic, dynamic nature of innovation nor anticipate how participants in a market might respond to incentives created by the regulation. Arguments that support “technology forcing” regulations often neglect the opportunities foregone when resources are devoted in a particular direction. Further, because regulations can confer competitive advantage on certain market participants at the expense of others, they provide incentives to focus innovative energy on influencing the rules, rather than innovating along more productive dimensions. Scholarship of the 1960s and 1970s showed that price and entry regulation tended to benefit organized interests at the expense of the broader public interest, and led to the economic deregulation movement that served to increase competition in several previously-regulated industries, with resulting improvements in innovation and consumer welfare. I hope to generate discussion of the effects of regulatory practices on innovation using current examples.
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