Regulatory Actions under Adjustment Costs and the Resolution of Scientific Uncertainty |
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Authors: | David A Hennessy GianCarlo Moschini |
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Institution: | David A. Hennessy and GianCarlo Moschini are professors at the Department of Economics and affiliates of the Center for Agricultural and Rural Development, Iowa State University. Moschini is also Pioneer Hi-Bred Endowed Chair in Science and Technology Policy. Senior authorship is not assigned. |
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Abstract: | 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. |
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Keywords: | Bayesian decision analysis inertia precautionary principle stochastic resolution of uncertainty |
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