Judged in Hindsight: Regulatory Incentives in Approving Innovations
Abstract: I study how limited information and ex-post evaluation by third parties with the benefit of hindsight affect how regulators approve innovations. In the face of ambiguity over innovation characteristics, such a regulator limits or delays product approval, even when she is not waiting for new information to arrive. When evidence is costly for firms to generate but can be selectively reported, the regulator delegates information acquisition to the firm with the objective of minimizing max-regret. This model can explain observed patterns of correlation between firm costs and benefits of approval, why regulators drag their feet on approval decisions even in the face of strong favorable evidence, and support for regulatory sandboxes even when they do not hasten learning.
