Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Abstract: This paper explores the role of regulation of new product entry when product quality is uncertain but market participants learn over time. We develop a model that captures the fundamental regulatory tradeo_ between information generation, access, and risk: weak regulation inhibits learning and exposes consumers to the risk of unproven new products, but overzealous regulation increases entry costs and reduces access to a narrow choice set of older technology. Using new data and exogenous variation between EU and US medical device regulatory rules, we document patterns consistent with our model, and then take a structural approach to estimate the welfare implications of current and alternative regulatory policies. For the set of devices on which we have data, we estimate that regulation plays an important role via its impacts of risk and market structure; and that the US is close to the optimal policy, whereas the EU requires too little pre-market testing. We also estimate that embracing recent calls for more active \post-market surveillance"could further increase total surplus by as much as 24 percent.