Regulating uncertain health hazards when there is changing risk information

The usual regulatory strategy for imperfectly understood risks is to regulate these hazards more stringently than would be dictated by myopic benefit-cost concerns, but when downward irreversibilities are present and there are opportunities for learning more about the risk over time, it is optimal to under-regulate the risk initially and then tighten the regulatory requirements after adverse information is acquired.

Abstract

The usual regulatory strategy for imperfectly understood risks is to regulate these hazards more stringently than would be dictated by myopic benefit-cost concerns. When downward irreversibilities are present and there are opportunities for learning more about the risk over time, it is optimal to under-regulate the risk initially and then tighten the regulatory requirements after adverse information is acquired. Upward irreversibilities that limit the ability to augment the health and safety investment level create the opposite result. The expected value of perfect prior information is a decreasing function of the probability of acquiring future risk information and the probability that the risk will be discovered to be severe.