REGULATION OF PRODUCT-SAFETY DESIGN THROUGH PRODUCT TESTING

The indirect regulation of product safety design through pre-market te sting is common with pharmaceuticals and other products containing che mical ingredients. We model this problem as a three stage game in whic h the firm begins by designing safety, next the government supervises a testing process, and finally the firm markets the product if it is a pproved. We characterize and compare the Nash and the two leadership e quilibria of this game, analyze the comparative statics of these solut ions, and consider the effects of regulatory misbehavior. We show that the effects of regulatory misbehavior depend crucially the type of fi rm-regulator interaction.