Nudges and Sludges: Regulating Innovation

Abstract

Whilst there is widespread agreement among decision makers that fostering innovation should be a priority, there is far less consensus on how to achieve this objective. Given the fact that the effects of new technologies are often unknown, in the early stages of technological development, there might be insufficient information for conducting a cost-benefit analysis. Under uncertainty, using strict regulatory measures might kill the innovation before the market matures, resulting in inefficiency. Moreover, strict regulation can infringe on entrepreneurs' right to conduct a business. In addition, using strict regulation without fully understanding the technology and the harm it might cause consumers might not provide them with the needed protection. We argue that when regulating new technologies, the use of nudges and sludges is a desirable policy tool, superior to most other policy tools available to regulators. Nudging leaves room for technological developments while allowing the regulators to rely on the Wisdom of the Crowd to move regulation in the most efficient direction.

Keywords: New Technologies, Regulation, Nudge, Sludge, Uncertainty

JEL Classification: K23, O31, O38