The Social Costs of Innovation Policy

12 Pages Posted: 25 Oct 2016

See all articles by Sinclair Davidson

Sinclair Davidson

RMIT University - School of Economics, Finance and Marketing

Jason Potts

RMIT University

Date Written: October 2016


Innovation policy is designed to produce social benefits by solving a market failure problem associated with private investment in new knowledge. Yet the social costs of these policy interventions are routinely ignored. We use the Djankov et al. (2003) institutional possibility frontier model to analyse the trade‐offs between the social costs of disorder and those of dictatorship that particular innovation policies impose. We show how different innovation policies impose different types of social costs. We conclude that the case for public support for innovation policies is often both distorted and overstated because of failure to account for social costs.

Keywords: innovation policy, institutional economics, market failure, rent‐seeking

Suggested Citation

Davidson, Sinclair and Potts, Jason, The Social Costs of Innovation Policy (October 2016). Economic Affairs, Vol. 36, Issue 3, pp. 282-293, 2016. Available at SSRN: or

Sinclair Davidson (Contact Author)

RMIT University - School of Economics, Finance and Marketing ( email )

440 Elizabeth Street
Melbourne, Victoria 3000
+61-3-9925-5869 (Phone)
+61-3-9925-5986 (Fax)

Jason Potts

RMIT University ( email )

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