An Activity-Generating Theory of Regulation
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.
We thank Gary Becker, Georgy Egorov, Edward Glaeser, Oliver Hart, Louis Kaplow, Richard Posner, Jesse Shapiro, Steven Shavell, and Lucy White for helpful comments. Schwartzstein acknowledges financial support from an NBER pre-doctoral fellowship in health and aging. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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