NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Activity-Generating Theory of Regulation

Joshua Schwartzstein, Andrei Shleifer

NBER Working Paper No. 14752
Issued in February 2009
NBER Program(s):   LE

We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to innovation are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are, and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w14752

Published: Joshua Schwartzstein & Andrei Shleifer, 2013. "An Activity-Generating Theory of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 56(1), pages 1 - 38. citation courtesy of

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