Oct 16, 2018

Gray Areas in States and Local Tech Regulation

This is the second installment in a three part series on federalism and technology.

States and cities can promote innovation through a variety of policies that encourage innovation and entrepreneurship and serve as the test beds for disruptive technologies. However, when dealing with 50 (or more) jurisdictions trying to determine the best way to regulate or promote a new technology, it is not always as clear that state attempts to encourage innovation and embrace new technologies successfully increase consumers’ access to these technologies.

While the laboratories of democracy are wonderful for creating a variety of regulatory options, doing so can create uncertainty for innovators seeking to deploy a product nationally. This is particularly challenging for innovations in fields such as transportation, financial services, and the Internet that transcend state and even national borders by their very nature. This uncertainty, whether real or perceived, can impact innovators’ willingness to launch and to attract the necessary investors.

For example, autonomous vehicle regulation has been done primarily by states and even local governments, which could create a patchwork problem with negative impacts on further development or widespread deployment. While there have been attempts at federal legislation on the matter, even the most mundane bills have tended to stall out in the process. Critics of continuing to allow states to largely control autonomous vehicle policy point to the fact that Audi refused to deploy its most advanced driver assistance technology in the United States due to its concerns over the lack of clarity and uncertainty of current regulations.

Still, in many cases trends start to emerge where innovators and investors can know what to expect even when policies are made at the state level. Provided that regulatory norms emerge quickly, it is possible to overcome what may at first appear to be a regulatory patchwork.

Even when states are properly playing their role as a laboratory of democracy to test new policy ideas, each state does not carry an equal influence on new innovations, the market for consumers, or the attention its policies get. For example, as Brian Knight points out in his work on FinTech and other emerging financial services, New York has become a powerful de facto national regulator due to its importance to the financial system and the difficulty in launching a financial product that would want or even be able to exclude the market. Similarly, more populous states with larger economies like California, Texas, or Florida are much more likely to have the political and economic power to effectively jawbone innovators into complying with their regulations even if it means a less ideal product.

Occasionally such regulations appear to reach a tipping point for disruptive technology that is more mobile and able to engage in innovation arbitrage. For example, following aggressive and burdensome California regulations of autonomous vehicles, Uber moved all of its driverless cars to the more innovation-welcoming Arizona. As the Arizona example illustrates, states that may be perceived as “less powerful” can still develop specialization and openness to innovation that can overcome the barriers of more powerful states.

Many of these problems with patchwork regulation and unequal bargaining power can be solved at least in part by cooperation between states. States that adopt model laws or enter into interstate compacts may lose some of the competitive advantages of federalism but also reduce regulatory uncertainty. In fact, a recent FTC Economic Liberty Task Force suggested such an approach to enhancing worker mobility and entrepreneurship through occupational licensure reform. Some states, like Nebraska and Arizona, have tackled this through formal efforts like the “Occupational Board Reform Act” and the “The Right to Earn a Living Act,” which would eliminate many regulatory burdens for those choosing to come to such states to innovate. It is not unreasonable to think that given the trends already emerging in certain disruptive technologies (like autonomous vehicles and the sharing economy) where states seem to be converging on very similar regulatory schemes.

The right to innovate and the right to earn a living are closely tied, and interstate compacts or model laws may work well to solve certain patchwork problems in technologies. For example, autonomous vehicles will need to be able to travel between states with relative certainty regarding their legality and operation. This seems like an area where a model law could ensure portability of innovation. More basic technological rights, such as the right to repair, could also be addressed through an interstate compact or model law, thereby allowing consumers and innovators to know for certain what rights they have to repair or modify advanced devices from iPhones to vacuums. Model laws and interstate compacts could have the greatest impact when the policy problems are related to the portability or movement of the technology or when they go to a fundamental understanding of individual rights associated with the technology or innovation more generally.

In the end, when states are aware that while they each act as a laboratory of democracy most companies must consider broader national or international costs of compliance, they may be able to collaborate and balance out many of the perceived issues with state level regulation. In the next installment of this series, I’ll discuss what can go wrong and the consequences for innovation when state and local technology policy is not focused on promoting innovation.

Photo credit: Sipa Asia/Shutterstock

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate