Working Paper BETA #2011-24

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Title : Innovation and diffusion in risky industries under liability law: the case of “double-impact” innovations

Author(s) : Julien Jacob

Abstract : We suggest a model of innovation and diffusion of a new technology in which two firms, one innovative and one non-innovative, undertake risky activities that are regulated by liability rules. One originality of this study is to consider the presence of a “double-impact” innovation, impacting both the cost of risk prevention and the probability of accident. We compare strict liability and negligence in terms of incentives to innovate, to adopt the new technology and to prevent the risk. We find that the type of innovation and the behavior of the Regulator play key roles: when the Regulator acts as a “leader”, a negligence rule is socially preferable if the innovation mainly impacts the cost of risk prevention. In other cases (Regulator as a “follower” and/or innovation with sufficiently high impact on the probability of accident), strict liability is preferable.

Key-words : Innovation, technological risk, strict liability, negligence.

JEL Classification : D81, K13, O31, Q55