bepress Legal Series

This article focuses on the question of how regulation can be best designed to encourage technological innovation. Most scholarship in this area applies standard economic analysis to evaluate the impact of various forms of regulation on technological innovation. We reject that approach as too narrow, drawing instead upon principles of evolutionary economics. The basic premise of the article is that a firm’s technology choices—and its response to regulation intended to shape those choices—are influenced by other actors (such as suppliers and competitors), by external social and legal institutions (e.g., industry standards and norms) and by the firms’ internal structure (such as communication channels.) Regulators seeking to encourage innovation must first understand the industry sector’s “selection environment;” that is, the socio-economic environment created by that network of actors, institutions, and routines. We demonstrate the selection environment approach in a case study of the dry cleaning sector, a leading source of toxic emissions in Southern California. Professional drycleaners have been slow to adopt alternative non-polluting cleaning technologies. Relying upon surveys and interviews we conducted of cleaners, equipment vendors, and regulators, we construct a conceptual model of the sector’s selection environment. We then use that model to identify barriers to innovation, and to evaluate several policy tools intended to overcome those barriers. Our analysis is a cautionary tale for those who support broad use of market-based regulation such as economic incentives and information strategies. In the selection environment we studied, traditional command and control regulation is likely to lead to broader diffusion of the new environmentally-beneficial cleaning technologies than market-based approaches, and at less social cost. Innovation, Regulation and the Selection Environment Timothy F. Malloy Professor of Law UCLA School of Law 405 Hilgard Avenue Los Angeles, California 90095 [email protected] 310-794-5278