Corruption and the Regulation of Innovation
UB Economics Working Papers E19/390
42 Pages Posted: 18 Nov 2019
Date Written: August 26, 2019
We study the optimal design of regulation for innovative activities which can have negative social repercussions. We compare two alternative regimes which may provide firms with different incentives to innovate and produce: lenient authorization and strict authorization. We find that corruption plays a critical role in the choice of the authorization regime. Corruption exacerbates the costs of using lenient authorization, under which production of socially harmful goods is always authorized. In contrast, corruption can be socially beneficial under strict authorization, since it can mitigate an over-investment problem. In the second part of the paper, we explore the design of bonuses, taxes, and ex-post liability to improve the regulatory outcome.
Keywords: Authorization, Collusion, Corruption, Extortion, Regulatory capture, Safety regulation
JEL Classification: D73, K42, L51
Suggested Citation: Suggested Citation