Product-Consumer Substitution and Safety Regulation

Konrad Grabiszewski and Alex Horenstein
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Konrad Grabiszewski: University of Miami

No 2017-01, Working Papers from University of Miami, Department of Economics

Abstract: We develop a theory of safety regulation where product safety and consumer skills are negatively correlated. This correlation, which we call the product-consumer substitution, is driven by demand and supply: consumers with lower skill choose safer products, while sellers offer less safe products only to consumers with high skills. We derive two predictions that are inconsistent with the standard theory: (1) an improvement in safety (regular effect of regulation) can occur in tandem with the standard offsetting behavior, and (2) a deterioration of safety (Peltzman effect) can occur without the standard offsetting behavior. As policy implication, we propose to use simultaneously product and consumer regulation. We validate our theory using a dataset with more than 2 million observations obtained from iRacing, an online racing simulation. Our dataset contains objective measures of product safety and consumer skills which makes it unique among the datasets used in the safety regulation literature.

Keywords: safety regulation; adverse selection; moral hazard Publication Status: Under Review (search for similar items in EconPapers)
JEL-codes: D8 K2 L5 (search for similar items in EconPapers)
Date: 2017-01-18
New Economics Papers: this item is included in nep-mkt
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