Abstract/Summary

In this article, I study the impacts of a specific incentives-based approach to safety regulation, namely the control of quality through sampling and threatening penalties when quality fails to meet some minimum standard. The welfare-improving impacts of this type of scheme seem high and are cogently illustrated in a recent contribution by Segerson, which stimulated many of the ideas in this paper. For this reason, the reader is referred to Segerson for a background on some of the motivation, and throughout, I make an effort to indicate differences between the two approaches. There are three major differences. First, I dispense with the calculus as much as possible, seeking readily interpreted, closedform solutions to illustrate the main ideas. Second, (strategically optimal, symmetric) Nash equilibria are the mainstay of each of the current models. Third, in the uncertainquality- provision equilibria, each of the Nash suppliers chooses the level of the lower bound for quality as a control and offers a draw from its (private) distribution in a contribution to the (public) pool of quality.