Regulation of product safety design through product testing

The indirect regulation of product safety design through pre-market testing is common with pharmaceuticals and other products containing chemical ingredients. We model this problem as a three stage game in which the firm begins by designing safety, next the government supervises a testing process, and finally the firm markets the product if it is approved. We characterize and compare the Nash and the two leadership equilibria of this game, analyze the comparative statics of these solutions, and consider the effects of regulatory misbehavior. We show that the effects of regulatory misbehavior depend crucially the type of firm-regulator interaction.The author thanks D. Craswell, S. Dasgupta, T. Gilligan, J. Matsusaka, J. Ye, and M. Zupan. Benefit was also derived from two anonomous referees and seminar participants at the University of California, Riverside, and The University of Southern California. Generous research support was provided by the