TY  - JOUR
AU  - Schwartzstein,Joshua
AU  - Shleifer,Andrei
TI  - An Activity-Generating Theory of Regulation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14752
PY  - 2009
Y2  - February 2009
UR  - http://www.nber.org/papers/w14752
L1  - http://www.nber.org/papers/w14752.pdf
N1  - Author contact info:
Joshua Schwartzstein
Dartmouth College
E-Mail: josh.schwartzstein@dartmouth.edu

Andrei Shleifer
Department of Economics
Harvard University
Littauer Center M-9
Cambridge, MA 02138
Tel: 617/495-5046
Fax: 617/496-1708
E-Mail: ashleifer@harvard.edu
AB  - 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.
ER  -