Regulation and responsible innovation

Abstract Should product harms be investigated by firms via “Responsible Innovation” (RI) or by regulators? Firms can investigate potential harms early on, but only by diverting resources from innovation. Regulators, by contrast, often investigate harms after products are on the market. We characterize the efficient solution, which hinges on the firm’s opportunity cost of RI—how sensitive innovation success is to resource diversion—and the regulator’s cost of investigating harms. Our main insights are threefold. First, efficiency assigns primary responsibility to the lowest-cost party: firms when innovation success is insensitive to resource diversion, regulators when innovation success is highly sensitive. Second, efficient regulatory actions can be implemented with standard tools—fines, bans, and investigations—but this hinders firms’ RI incentives. Third, competition reduces RI investments for each firm but can raise aggregate RI. Our results highlight the trade-off between efficient oversight and incentives for responsible innovation while cautioning against one-size-fits-all regulation (JEL L51, M14, O32, D82).