Industry Self-governance and National Security: on the Private Control of Dual Use Technologies
Abstract: Private sector firms frequently sell `dual use products' that can be used to develop either civilian goods (e.g. medicines) or weapons of mass destruction (e.g. genetically engineered viruses). We assume two risks due to the `dual use' nature. First, the upstream makers face legal liability if their products lead to a disaster. Second, a disaster may produce regulatory backlash, i.e. excessive government regulation that effectively suppresses the tool along with downstream industry's expected profits from developing new products. This paper explores the economic conditions for downstream firms imposing strong industry-wide regulation on their upstream suppliers. We find that regulatory backlash is never an adequate substitute for perfect (i.e. full) liability and even makes the situation worse. Second, industry regulation enforced by downstream firms and optimal regulation converge when the downstream firms have strong market power. Next, we show that established upstream firms may be able to deter entry in proposing a high regulatory standard. Finally we analyze when and why large downstream firms are able to force their preference for high levels of regulation on upstream suppliers.