Thursday, December 11, 2008
Posted by D. Daniel Sokol
Keith N. Hylton, Boston University - School of Law and Haizhen Lin, Indiana University - Kelley School of Business discuss Innovation and Optimal Punishment, with Antitrust Applications in their latest paper.
ABSTRACT: This paper modifies the optimal penalty analysis by incorporating investment incentives with external benefits. In the models examined, the recommendation that the optimal penalty should internalize the marginal social harm is no longer valid as a general rule. We focus on antitrust applications. In light of the benefits from innovation, the optimal policy will punish monopolizing firms more leniently than suggested in the standard static model. It may be optimal not to punish the monopolizing firm at all, or to reward the firm rather than punish it. We examine the precise balance between penalty and reward in the optimal punishment scheme.