On Butterflies and Frankenstein: A Dynamic Theory of Regulation

There are major differences in regulation among various countries. A particular case is the difference between the EU and US in regulating biotechnology.We develop a formal and dynamic model of government decision-making on regulation. We show that minor differences in consumer preferences can lead to important and persistent regulatory differences, and that temporary shocks to preferences can have long-lasting effects. This hysteresis in regulatory differences is shown to be caused by producer protectionist motives. We argue that this model may contribute to explain the difference between EU and US biotechnology regulation.