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Regulatory Actions under Adjustment Costs and the Resolution of Scientific Uncertainty
Author(s) -
Hennessy David A.,
Moschini GianCarlo
Publication year - 2006
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.1467-8276.2006.00860.x
Subject(s) - incentive , information asymmetry , resolution (logic) , uncertainty , economics , public economics , regulator , microeconomics , risk analysis (engineering) , business , computer science , chemistry , statistics , mathematics , artificial intelligence , biochemistry , gene
Food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future. In a model with three decision points and stochastic resolution of uncertainty, we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban. Adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned, and also a bias against imposing an early ban. The prospect of more later‐stage information can increase or decrease the incentive to ban early, but research decreases the incentive to ban early.