Product-Consumer Substitution and Safety Regulation
44 Pages Posted: 30 Mar 2017 Last revised: 20 May 2017
Date Written: March 1, 2017
We develop a theory of safety regulation where product safety and consumer skills are negatively correlated. Demand and supply drive this correlation. Given the option to choose any product, low skill consumers choose safer products. Given the option of selling to any consumer, producers chose to sell riskier products to high skill consumers. Our theory has broad implication as it applies to any case in which consumption can harm a consumer (e.g., recreational sports, driving, investing). We validate our theory using a data set obtained from iRacing, an online racing simulator. A unique and important feature of our data is that it contains objective measures of product safety and consumer skill. We also provide policy implications and suggest a novel type of regulation policy (two-dimensional regulation).
Keywords: safety regulation; product safety; consumer skills; product-consumer substitution; moral hazard; adverse selection
JEL Classification: D80, K20, L50
Suggested Citation: Suggested Citation