Corruption and the Regulation of Innovation
61 Pages Posted: 10 Nov 2020
Date Written: September 20, 2020
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. Hence, more pervasive corruption favors the adoption of a strict authorization regime and may increase welfare.
Keywords: Authorization, Collusion, Corruption, Extortion, Incentive policy, Innovation, Investment, Regulatory capture, Safety regulation
JEL Classification: D73, K42, L51
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