OFFSETTING BEHAVIOR AND THE BENEFITS OF SAFETY REGULATIONS

The net effect of policies to reduce harm to potential victims is sometimes much smaller than the predicted effect because of failure to account for victim offsetting behavior (OB). A simple expected accident loss model is developed where one parameter, the coefficient of diminishing returns, measures quantitatively the marginal offset to the direct policy. The model should be useful in empirical efforts to estimate the OB effect. The article also obtains precise conditions under which OB more than offsets the direct policy effect, shows that stronger risk aversion increases the relative size of OB, and discusses welfare implications of OB. (JEL D18 , D61 , J28 , K32 , L51 )