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Recent AI algorithms are blackbox models whose decisions are difficult tointerpret. eXplainable AI (XAI) seeks to address lack of AI interpretabilityand trust by explaining to customers their AI decision, e.g., decision toreject a loan application. The common wisdom is that regulating AI by mandatingfully transparent XAI leads to greater social welfare. This paper challengesthis notion through a game theoretic model for a policy-maker who maximizessocial welfare, firms in a duopoly competition that maximize profits, andheterogenous consumers. The results show that XAI regulation may be redundant.In fact, mandating fully transparent XAI may make firms and customers worseoff. This reveals a trade-off between maximizing welfare and receivingexplainable AI outputs. We also discuss managerial implications forpolicy-maker and firms.

Sell Me the Blackbox! Regulating eXplainable Artificial Intelligence (XAI) May Harm Consumers