Water that is Too Clear Has Few Fish : A Tradeoff between AI Regulation and Innovation

In response to the rapid development of AI, several governments have established a variety of regulatory interventions for this technology. While some countries prioritise consumer protection through stringent regulation, others promote innovation by adopting a more hands-off approach. However, this tradeoff has not been analyzed systematically. We developed an economic theory of how the welfare-maximizing level of regulatory stringency for AI depends on various institutional parameters. Our game-theoretic model is motivated and built upon the comparison of regulatory documents for AI from the EU, the UK, Russia, and China. The results show that if a government strives to find the right balance between innovation and consumer protection to maximize the actual consumer welfare, stringent regulation is optimal when foreign competition is either high or low, whereas light-touch regulation is optimal when foreign competition is intermediate. Meanwhile, minimal regulation are rationalizable if a government prioritizes innovation, domestic producer surplus, or perceived consumer welfare