Innovating safely: how public policies can prevent regrettable substitutions

We consider the case of a firm selling a product which may cause harm to others. The firm can engage in an R&D project to discover a new substitution product, which may be more dangerous than the historical product. To decrease the likelihood of facing such a case of "regrettable substitution", the firm can make a "safeness" effort to try to design a less dangerous product. We compare three policy regimes (civil liability and approval systems, these latter ones being used in combination, or not, with a ban on the old product) according to their impact on the firm's decisions and their consequences on social welfare. We find that the ranking between policy regimes mainly depends on the public regulator's expertise, the firm's ability to derive market value from public approval, and the characteristics of the risk under consideration: a high probability of the product causing harm gives social value to civil liability, while a high magnitude of harm tends to give more value to an approval system with a ban on the old product.