Regulating the direction of innovation

Abstract

This paper examines the regulation of technological innovation direction under uncertainty about potential harms. We develop a model with two competing technological paths and analyse various regulatory interventions. The optimal regulatory approach depends critically on the magnitude of potential harm relative to technological benefits. Our analysis reveals a motive to double down on harmful technologies in resource allocation across research paths, challenging common intuitions about diversification. We demonstrate that ex post regulatory instruments, particularly liability regimes, outperform ex ante restrictions in many scenarios. These insights have important implications for regulating emerging technologies like artificial intelligence, suggesting the need for informationally-responsive regulatory frameworks.