Regulatory Actions Under Adjustment Costs and the Resolution of Scientific Uncertainty

16 Pages Posted: 22 Apr 2020

See all articles by David Hennessy

David Hennessy

Iowa State University

GianCarlo Moschini

Iowa State University - Department of Economics

Date Written: May 2006

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.

Keywords: Bayesian decision analysis, inertia, precautionary principle, stochastic resolution of uncertainty

Suggested Citation

Hennessy, David and Moschini, GianCarlo, Regulatory Actions Under Adjustment Costs and the Resolution of Scientific Uncertainty (May 2006). American Journal of Agricultural Economics, Vol. 88, Issue 2, pp. 308-323, 2006, Available at SSRN: https://ssrn.com/abstract=3581960 or http://dx.doi.org/10.1111/j.1467-8276.2006.00860.x

David Hennessy (Contact Author)

Iowa State University

GianCarlo Moschini

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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