Regulatory Actions Under Adjustment Costs and the Resolution of Scientific Uncertainty

Posted: 8 May 2006

See all articles by David A. Hennessy

David A. Hennessy

Iowa State University - Department of Economics

GianCarlo Moschini

Iowa State University - Department of Economics

Abstract

Food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future. In a model with three decision points and stochastic resolution of uncertainty, we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban. Adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned, and also a bias against imposing an early ban. The prospect of more later-stage information can increase or decrease the incentive to ban early, but research decreases the incentive to ban early.

Suggested Citation

Hennessy, David A. and Moschini, GianCarlo, Regulatory Actions Under Adjustment Costs and the Resolution of Scientific Uncertainty. American Journal of Agricultural Economics, Vol. 88, No. 2, pp. 308-323, May 2006, Available at SSRN: https://ssrn.com/abstract=896334 or http://dx.doi.org/10.1111/j.1467-8276.2006.00860.x

David A. Hennessy

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-6171 (Phone)

GianCarlo Moschini (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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