Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability

59 Pages Posted: 8 Oct 2018 Last revised: 14 Jul 2021

See all articles by Emeric Henry

Emeric Henry

Institut d'Etudes Politiques de Paris (Sciences Po)

Marco Loseto

University of Chicago

Marco Ottaviani

Bocconi University - Department of Economics

Date Written: October 2018

Abstract

We analyze the optimal mix of ex ante experimentation and ex post learning for the dynamic adoption of activities with uncertain payoffs in a two-phase model of information diffusion. In a first pre-introduction phase, costly experimentation is undertaken to decide whether to adopt an activity or abandon experimentation. In a second stage following adoption, learning can continue possibly at a different pace while the activity remains in place; the withdrawal option is exercised following the accumulation of sufficiently bad news. We compare from a law and economics perspective the performance of three regulatory frameworks commonly adopted to govern private experimentation and adoption incentives: liability, withdrawal, and authorization regulation. Liability should be preempted to avoid chilling of activities that generate large positive externalities, consistent with the preemption doctrine. Liability should be used to discourage excessive experimentation for activities that generate small positive externalities. Authorization regulation should be lenient whenever it is used, consistent with the organization of regulation in a number of areas ranging from product safety to antitrust.

JEL Classification: D18, D83, K13, K2, M38

Suggested Citation

Henry, Emeric and Loseto, Marco and Ottaviani, Marco, Regulation with Experimentation: Ex Ante Approval, Ex Post Withdrawal, and Liability (October 2018). CEPR Discussion Paper No. DP13224, Available at SSRN: https://ssrn.com/abstract=3262549

Emeric Henry (Contact Author)

Institut d'Etudes Politiques de Paris (Sciences Po) ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

Marco Loseto

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Marco Ottaviani

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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