Sedimentary Innovation: How Regulation Should Respond to Incremental Change

Innovation and the State: Finance, Regulation, and Justice (Cambridge University Press, 2017 Forthcoming)

26 Pages Posted: 12 May 2017

See all articles by Cristie Ford

Cristie Ford

Peter A. Allard School of Law

Date Written: May 5, 2017

Abstract

As captivating as paradigm-changing "radical" innovations may be, “sedimentary”, or incremental, innovation – incremental improvements based on imitation, tweaking, bricolage and diffusion – are in fact the main way in which innovation actually develops. In finance, sedimentary innovation is shaped by forces including structural and social networks, a strong first mover advantage, and collective action problems. This piece, which is Chapter 8 in a forthcoming book that considers financial innovation as a regulatory challenge, examines sedimentary innovation in particular. Like innovation generally, sedimentary innovation can profoundly undermine regulation across time. It can bury structures designed to contain it and can transform the landscape, even while not seeming to be doing much at all. Sedimentary innovation is conceptually linked to flexible regulation (the book's other main concern), but also presents challenges for it. For example, humans struggle to recognize sedimentary change in real time, due among other things to cognitive limitations and bounded rationality. Regulatory boundary and coordination problems also pose unique problems in this context. The chapter offers some regulatory responses to the challenges posed by sedimentary innovation, including improving analytic capacity, recognizing network effects and predictable cognitive limits, and building in institutional contrarians and system “breakers”.

Keywords: flexible regulation, incremental innovation, financial innovation, network effects, Brandeis, laboratories for democracy, herding, behavioral finance, epistemology, regulation, coordination problems

Suggested Citation

Ford, Cristie L., Sedimentary Innovation: How Regulation Should Respond to Incremental Change (May 5, 2017). Innovation and the State: Finance, Regulation, and Justice (Cambridge University Press, 2017 Forthcoming), Available at SSRN: https://ssrn.com/abstract=2963488

Cristie L. Ford (Contact Author)

Peter A. Allard School of Law ( email )

University of British Columbia
1822 East Mall
Vancouver, British Columbia V6T 1Z1
Canada

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