Innovation Sticks: The Limited Case for Penalizing Failures to Innovate

Abstract

When policymakers and academics think about designing optimal innovation incentives, they almost exclusively limit their considerations to various types of reward incentives-that is, innovation "carrots." But in this Article, we show that, under specific circumstances, innovation "sticks'-potential penalties for failures to innovate-can play valuable roles in our innovation policy, either alone or in conjunction with innovation carrots. We also provide examples of several innovation sticks that have already been used with apparent success, including the federal Corporate Average Fuel Economy standards. Finally, we apply our approach to a new area-the problem of car fatalities-to illustrate the potential of innovation sticks to yield substantial social benefits. Our model suggests that a relatively simple system of yardstick penalties could help reduce national auto fatalities by as much as 20 percent simply by bringing laggard entities (such as companies and states) up to the median.