This paper presents a dynamic model of optimal product regulation in which consumer acceptance and the rate of product innovation are included as endogenous variables. Insights derived from the model are used to critically evaluate recent policy controversies regarding regulation of agricultural biotechnology. The results of the analysis indicate that if regulatory policy significantly affects consumer risk perceptions, more stringent regulatory requirements than those based solely on scientific risk assessment may be economically efficient. When demand is endogenously affected by regulatory policies, industry may also benefit from stronger regulations even if this results in a significant increase in product development costs.