Product-Consumer Substitution and Safety Regulation

44 Pages Posted: 30 Mar 2017 Last revised: 20 May 2017

See all articles by Konrad Grabiszewski

Konrad Grabiszewski

University of Miami - School of Business Administration

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics

Date Written: March 1, 2017

Abstract

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

Grabiszewski, Konrad and Horenstein, Alex R., Product-Consumer Substitution and Safety Regulation (March 1, 2017). Available at SSRN: https://ssrn.com/abstract=2942530 or http://dx.doi.org/10.2139/ssrn.2942530

Konrad Grabiszewski

University of Miami - School of Business Administration ( email )

Department of Economics
P.O. Box 248126
Coral Gables, FL 33124
United States

Alex R. Horenstein (Contact Author)

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

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