PRODUCT SAFETY IN A REGULATED INDUSTRY: EVIDENCE FROM THE RAILROADS

It is sometimes argued that a relaxation of price controls in a regulated industry would lead to a decrease in profits and hence to an incentive for firms to skimp on safety. Theory does not allow us to sign the relationship between prices and safety a priori. Analysis of data from the railroad industry from 1963–67 indicates 1) profitable railroads have fewer accidents per mile than do unprofitable roads; 2) for profitable roads, if there is any relationship at all between accidents and profitability it is positive: more profitable roads have more accidents (per mile); and 3) for unprofitable roads, accident rates rise as losses rise.