34 Pages Posted: 12 Mar 2016 Last revised: 27 Dec 2016
Date Written: March 11, 2016
An inescapable feature of regulation is the existence of loopholes: activities that formally comply with the text of regulation, but which in practice avoid the desired outcome of the regulation. Considerable ingenuity may be devoted to exploiting regulatory loopholes. Where technological regulation is at issue, such ingenuity may often be devoted to developing new technology that avoids the regulation; such innovation may be termed “perverse” because it is directed to avoiding the regulation that prompted it. Nonetheless, in this essay I argue that such regulatory circumvention may result in socially beneficial innovation. Drawing on insights from innovation policy in the law of intellectual property, I suggest several principles that should be adopted to channel such perverse innovation toward constructive activity.
Keywords: innovation, loophole, avoision, patent racing, regulation, regulatory compliance, Aereo, Grokster, Napster, CAFE, incentives
JEL Classification: O31, O32, O33, O34
Suggested Citation: Suggested Citation