Forgone Innovation: Regulatory Lock-in and Elimination of Economic Niches

Abstract

This paper takes an evolutionary, emergent approach to analyze the relationship between regulation and innovation. I treat innovation as an outcome of recombination and exchange, and regulations as results of entangled interactions between political and market enterprises. To extract private gains in a setting of inalienable property rights, regulators tend to alter relative prices in favor of market incumbents. These alterations render some recombinations and trades infeasible. While not all of the eliminated recombinations would have become successful or could even have been explored, regulations eradicate potentially valuable innovations by suppressing their discovery.

Keywords: innovation, regulation, switching costs, creative dynamics, entangled political economy, tinkering

JEL Classification: B25, L26, O30, 031