Product innovation, signaling, and endogenous regulatory delay

This paper examines the determinants of the timing of a monopolistic firm’s product innovation and regulatory approval, and proposes a signaling model with endogenous regulatory delay. Regulatory delay exerts a multiplier effect on total time to market, because when the firm expects the regulator to take longer to grant approval, the firm delays its product introduction. The firm can time its innovation to communicate its private information about the marginal cost of delay to the regulator. Successful signaling in the separating equilibrium leads the regulator to reduce regulatory delay. The implications of the model are consistent with data on innovation and regulatory delay in telecommunications markets in a few Midwest states in the US.