Regulation of Product Safety Characteristics under Imperfect Observability
In this paper, we consider the problem of setting minimum safety standards for observable safety characteristics and the proper amount of effort in the production of safety for a product which has some unobservable safety attributes. We formulate a second-best optimum for a regulator, examine the interplay between safety effort and a minimum safety standard, and study how the internalization of excess costs or benefits by a self-interested regulator affects the minimum safety standard and the safety effort level. Finally, we present two examples using a utility function which is widely used in the law and economics literature. Copyright 1994 by Kluwer Academic Publishers
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