Fugazi regulation for AI: strategic tolerance for ethics washing

Abstract Regulation theory offers a unique perspective on the institutional aspects of digital capitalism’s accumulation regime. However, a gap exists in examining the associated mode of regulation. Based on the analysis of AI ethics washing phenomenon, we suggest the state is delicately balancing between fueling innovation and reducing uncertainty in emerging technologies. This balance leads to a unique mode of regulation, "Fugazi regulation," characterized by vaguely defined, non-enforceable moral principles with no specific implementation mechanisms. We propose a microeconomic model that rationalizes this approach and shows that it is justifiable when the government struggles to differentiate between benign and harmful technology use due to capacity constraints. The potential for private companies to adopt ethical practices under Fugazi regulation supports the government’s preference for this method. This regulation mode is particularly attractive to the government during technology’s early development stages, marked by governmental optimism and uncertainty about the technology. Implications for greenwashing are also derived from the analysis.